<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1998
REGISTRATION NO. 333-41219
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ARTISAN COMPONENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0278185
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1195 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 734-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MARK R. TEMPLETON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ARTISAN COMPONENTS, INC.
1195 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 734-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ROBERT P. LATTA, ESQ. LAIRD H. SIMONS, III, ESQ.
ROSEMARY G. REILLY, ESQ. RICHARD L. DICKSON, ESQ.
JULIA REIGEL, ESQ. DAVID A. BELL, ESQ.
WILSON SONSINI GOODRICH & ROSATI FENWICK & WEST LLP
PROFESSIONAL CORPORATION TWO PALO ALTO SQUARE
650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94306
PALO ALTO, CALIFORNIA 94304 (650) 494-0600
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value per share........ $30,015,000 $9,096 (2)
================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee. The estimate is made pursuant to Rule 457(o) of the
Securities Act of 1933, as amended.
(2) Previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 13, 1998
[LOGO OF ARTISAN COMPONENTS, INC.]
- --------------------------------------------------------------------------------
2,900,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
All of the 2,900,000 shares of Common Stock, par value $0.001 per share
("Common Stock"), are being sold by Artisan Components, Inc. ("Artisan" or
the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock. It is currently estimated that the
initial public offering price will be between $7.00 and $9.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has applied to have the Common
Stock approved for listing on the Nasdaq National Market under the symbol
"ARTI."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS
PRICE TO UNDERWRITING TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $850,000, payable by the Company.
(3) The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted the Underwriters a 30-day option to purchase
up to 435,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively, and the proceeds to the Selling
Stockholders will be $ . See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel and certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer
and to reject orders in whole or in part. Delivery of the shares of Common
Stock offered hereby to the Underwriters is expected to be made in New York,
New York on or about , 1998.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is , 1998.
<PAGE>
[LOGO OF ARTISAN]
A leading provider of intellectual property components for the world's
semiconductor suppliers.
[SCHEMATIC DEPICTING CONCEPTUAL FRAMEWORK FOR COMPLEX SYSTEM-ON-A-CHIP ICS IN
COMPARISON TO A PRINTED CIRCUIT BOARD SYSTEM]
Artisan enables the design of complex System-on-a-Chip ICs that combine all
of the functionality of PCB systems onto a single IC. These ICs are optimal
for use in complex, high-volume applications such as:
-- Portable Computing Devices
-- Mobile Phones
-- Consumer Multimedia Products
-- Automotive Electronics
-- Personal Computers & Workstations
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Except as otherwise noted herein, information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) an increase in
the authorized shares of Common Stock to 50,000,000 shares, (iii) the one-for-
two reverse stock split effected in November 1997, (iv) the reincorporation of
the Company from California to Delaware which occurred in January 1998, (v)
the conversion of all outstanding shares of Preferred Stock of the Company
into shares of Common Stock of the Company upon the closing of this Offering,
(vi) the exercise of a warrant to purchase 50,000 shares of Common Stock and
(vii) the filing, upon the closing of this Offering, of a Restated Certificate
of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is qualified in
its entirety by the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Artisan is a leading developer of high performance, low power and high
density embedded memory and other intellectual property ("IP") components for
the design and manufacture of complex integrated circuits ("ICs"). The Company
offers highly differentiated memory, standard cell and input/output ("I/O")
components that meet the acute needs of complex single chip system ("System-on-
a-Chip") ICs for performance, power and density. The Company's products are
optimized for each customer's manufacturing process and are delivered ready for
use with industry standard and proprietary IC design tools. Artisan's objective
is to be the leading supplier of high performance IP components to the
semiconductor market by (i) focusing on key IP components for high volume
System-on-a-Chip ICs, (ii) targeting leading semiconductor manufacturers, (iii)
generating revenue through an innovative business model, (iv) proliferating its
IP components throughout customer ICs, (v) leveraging its product development
process and (vi) maintaining its technological leadership. The Company licenses
its products to semiconductor manufacturers and fabless semiconductor companies
for the design of ICs used in complex, high volume applications such as
portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations. Artisan has
licensed its products to many leading semiconductor manufacturers including
Chartered Semiconductor, Fujitsu Microelectronics, GEC Plessey, NEC
Electronics, OKI Electric, SGS-THOMSON, TSMC, Toshiba and VLSI Technology.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............... 2,900,000 shares
Common Stock outstanding after the Offering....... 12,074,075 shares(1)
Use of proceeds................................... General corporate purposes, including working
capital and capital expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............ ARTI
</TABLE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER QUARTER ENDED
30, DECEMBER 31,
--------------------- -------------
1995 1996 1997 1996 1997
STATEMENT OF OPERATIONS DATA: ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................... $2,718 $4,147 $8,912 $1,385 $3,329
Total cost and expenses..................... 2,715 3,574 8,128 1,315 3,095
Operating income............................ 3 573 784 70 234
Net income (loss)........................... (33) 532 725 75 219
Diluted earnings per share (historical)..... $ 0.08 $ 0.01 $ 0.02
Pro forma net income (unaudited)(2)......... $ 21 $ 409
Diluted earnings per share (unaudited)(2)... $ 0.00 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
BALANCE SHEET DATA: ----------- --------------
(UNAUDITED)
<S> <C> <C>
Cash, cash equivalents and marketable securities..... $ 3,536 $24,262
Working capital...................................... 4,009 24,735
Total assets......................................... 13,477 34,203
Long term liabilities, net of current portion(4)..... 241 241
Total stockholders' equity........................... 9,574 30,300
</TABLE>
- -------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
(i) 1,401,411 shares of Common Stock issuable upon the exercise of
outstanding options under the Company's 1993 Stock Option Plan (the "1993
Plan") with a weighted average exercise price of $2.06 per share and
2,072,259 shares of Common Stock reserved for future issuance thereunder,
(ii) 600,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") and (iii)
200,000 shares of Common Stock reserved for issuance under the Company's
1997 Director Option Plan (the "Director Plan"). See "Management--Stock
Plans," "Description of Capital Stock" and Notes 9 and 14 of Notes to
Financial Statements. On January 12, 1998, the Company granted options to
purchase 491,700 shares and 240,000 shares of Common Stock at exercise
prices of $7.00 and $7.70 per share, respectively, and, therefore, as of
January 12, 1998, 2,103,549 shares of Common Stock were issuable upon the
exercise of outstanding options under the 1993 Plan with a weighted average
exercise price of $3.89 per share, and 1,340,559 shares of Common Stock
were reserved for future issuance thereunder.
(2) Prior to March 1996, the Company was a subchapter S corporation and,
therefore, was not subject to entity level taxation. Pro forma net income
includes pro forma tax expense as if the Company was taxed as a C
corporation in fiscal 1995 and 1996.
(3) As adjusted to reflect the sale by the Company of the 2,900,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$8.00 per share and after deducting the estimated underwriting discount and
offering expenses, and receipt of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(4) Long term liabilities consist of deferred rent and deferred revenue. See
Note 8 of Notes to Financial Statements.
3
<PAGE>
THE COMPANY
Artisan is a leading developer of high performance, low power and high
density embedded memory and other IP components for the design and manufacture
of complex ICs. The Company offers highly differentiated memory, standard cell
and I/O components that meet the acute needs of complex System-on-a-Chip ICs
for performance, power and density. The Company's products are optimized for
each customer's manufacturing process and are delivered ready for use with
industry standard and proprietary IC design tools. Artisan's objective is to
be the leading supplier of high performance IP components to the semiconductor
market by (i) focusing on key IP components for high volume System-on-a-Chip
ICs, (ii) targeting leading semiconductor manufacturers, (iii) generating
revenue through an innovative business model, (iv) proliferating its IP
components throughout customer ICs, (v) leveraging its product development
process and (vi) maintaining its technological leadership. The Company
licenses its products to semiconductor manufacturers and fabless semiconductor
companies for the design of ICs used in complex, high volume applications,
such as portable computing devices, cellular phones, consumer multimedia
products, automotive electronics, personal computers and workstations.
The development of the merchant IP component market has resulted from the
continuing trend toward horizontal specialization in the semiconductor
industry, a trend that has been driven by a growth in manufacturing capacity
and an increasing focus on core competencies. Semiconductor manufacturers are
continuing to focus on semiconductor design and manufacturing processes and
are beginning to outsource the design of particular IP components critical to
the successful development of complex System-on-a-Chip ICs. This trend favors
the emergence of a substantial merchant IP component market that is estimated
by industry sources to grow from approximately $760 million in 1997 to
approximately $2.6 billion in the year 2001. In addition, advances in
semiconductor manufacturing processes have made it possible to place
approximately 40 million transistors on a single IC, a number that is widely
expected to increase to nearly 100 million transistors by the end of the
decade. Each of these transistors must be individually designed and tested
and, consequently, the gap is increasing between what can be manufactured and
what can be designed within the time to market requirements of the
semiconductor manufacturer.
Artisan provides high performance and low power embedded memory, standard
cell and I/O components customized to each customer's manufacturing process.
Together, these components constitute approximately 80% of the silicon area on
a typical System-on-a-Chip IC. Improvements in the performance of these
components, particularly memory, can have a significant impact on the overall
performance of the IC. The Company's IP components are designed to offer
semiconductor manufacturers high performance, cost effective solutions that
reduce the time required to bring new ICs to market. The Company believes that
it provides the fastest memory products and the most dense standard cell
products currently available in the merchant IP component market.
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components freely to their internal design teams
and to fabless semiconductor companies that manufacture at the same facility.
The Company believes that this licensing approach encourages proliferation of
the Company's products and provides a highly efficient distribution channel
for its IP components. The Company's revenue increased from $2.7 million in
fiscal 1995 to $4.1 million in fiscal 1996 and to $8.9 million in fiscal 1997,
representing a compound annual growth rate of 81.4% over this two year period.
Artisan has licensed its products to many leading semiconductor manufacturers
including Chartered Semiconductor Manufacturing, Inc. ("Chartered"), Fujitsu
Microelectronics, Inc. ("Fujitsu"), GEC Plessey Semiconductor Ltd. ("GEC
Plessey"), NEC Electronics, Inc. ("NEC"), OKI Electric Industry Co., Ltd.
("OKI"), SGS-THOMSON MICROELECTRONICS S.r.l. ("SGS-THOMSON"), Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), Toshiba International
Corporation ("Toshiba") and VLSI Technology, Inc. ("VLSI Technology").
The Company was incorporated in California in April 1991 as VLSI Libraries
Incorporated and changed its name to Artisan Components, Inc. in March 1997.
The Company reincorporated in Delaware in January 1998. The Company's
principal executive offices are located at 1195 Bordeaux Drive, Sunnyvale,
California 94089, and its telephone number is (408) 734-5600.
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered by this Prospectus. When used in this
Prospectus, the words "expects," "anticipates," "estimates" and similar
expressions are intended to identify forward looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below and
elsewhere in this Prospectus. Actual results could differ materially from
those projected in the forward looking statements as a result of the risk
factors discussed below and elsewhere in this Prospectus.
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated in the past as a result of a number of factors including the
relatively large size and small number of customer orders during a given
period; the timing of customer orders; delays in the design process due to
changes by a customer to its order after it is placed; the Company's ability
to achieve progress on percentage of completion contracts; the length of the
Company's sales cycle; the Company's ability to develop, introduce and market
new products and product enhancements; the timing of new product announcements
and introductions by the Company and its competitors; market acceptance of the
Company's products; the demand for semiconductors and end user products that
incorporate semiconductors; and general economic conditions. The Company's
future operating results may fluctuate from quarter to quarter and on an
annual basis as a result of these and other factors, in particular the
relatively large size and small number of customer orders during a given
period and the rate of royalties recognized in a given period. Accordingly, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely decline, perhaps
substantially.
Revenue in any quarter is dependent on a number of factors, and is not
predictable with any degree of certainty. Since the Company's expense levels
are based in part on management's expectations regarding future revenue, if
revenue is below expectations in any quarter, the adverse effect may be
magnified by the Company's inability to adjust spending in a timely manner to
compensate for any revenue shortfall. The Company also intends to increase its
sales and marketing expenses in an attempt to broaden its market coverage. The
Company's costs and expenses will be based in part on the Company's
expectations of future revenue from product licenses. Accordingly, if the
Company does not realize its expected revenue, its business, operating results
and financial condition could be materially adversely affected.
The Company's sales cycle can be lengthy and is subject to a number of risks
over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing
of the receipt of an order can have a significant impact on the Company's
revenue for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders
from customers would have a material adverse effect on the Company's business,
operating results and financial condition.
To date, a substantial majority of the Company's revenue has been recognized
on a percentage of completion method. Provisions for estimated losses on the
uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined. As the completion period ranges from three to six
months, the revenue in any quarter is dependent
5
<PAGE>
on the Company's progress toward completion of the project. There can be no
assurance that the Company's estimates will be accurate, and, in the event
they are not, the Company's business, operating results and financial
condition in subsequent periods could be materially adversely affected. From
time to time, the Company experiences delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve such progress could result in damage
to customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the
Company's contracts with customers generally may be canceled without cause,
and, if a customer cancels or delays performance under any such contracts, the
Company's business, operating results and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON EMERGENCE OF MERCHANT IP COMPONENT MARKET AND BROAD MARKET
ACCEPTANCE OF THE COMPANY'S PRODUCTS. The market for merchant IP components
has only recently begun to emerge. The Company's ability to achieve sustained
revenue growth and profitability in the future will depend on the continued
development of this market and, to a large extent, on the demand for System-
on-a-Chip ICs. There can be no assurance that the merchant IP component and
System-on-a-Chip markets will continue to develop or grow at a rate sufficient
to support the Company's business. If either of these markets fails to grow or
develops slower than expected, the Company's business, operating results and
financial condition would be materially adversely affected. To date, the
Company's IP products have been licensed only by a limited number of
customers. The vast majority of the Company's existing and potential customers
currently rely on components developed internally and/or by other vendors. The
Company's future growth, if any, is dependent on the adoption of, and
increased reliance on, merchant IP components by both existing and potential
customers. Moreover, if the Company's products do not achieve broad market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected.
COMPETITION. The Company's strategy of targeting semiconductor manufacturers
that participate in, or may enter, the System-on-a-Chip market requires the
Company to compete in intensely competitive markets. Within the merchant
segment of the IP component market, the Company competes primarily against
Aspec Technology, Inc. ("Aspec"), Avant! Corporation ("Avant!"), Cascade
Design Automation Inc., a subsidiary of OKI ("Cascade Design"), Mentor
Graphics Corporation ("Mentor Graphics"), and the Silicon Architects group of
Synopsys, Inc. ("Synopsys"). In addition, the Company may face competition
from consulting firms and companies that typically have operated in the
generic library segment of the IP market and that now seek to offer customized
IP components as enhancements to their generic solutions. The Company also
faces significant competition from the internal design groups of the
semiconductor manufacturers that are expanding their manufacturing
capabilities and portfolio of IP components to participate in the System-on-a-
Chip market. These internal design groups compete with the Company for access
to the parent's IP component requisitions and may eventually compete with the
Company to supply IP components to third parties on a merchant basis. There
can be no assurance that internal design groups will not expand their product
offerings to compete directly with those of the Company or will not actively
seek to participate as merchant vendors in the IP component market by selling
to third party semiconductor manufacturers or, if they do, that the Company
will be able to compete against them successfully. In addition to competition
from companies in the merchant IP component market, the Company faces
competition from vendors that supply electronic design automation ("EDA")
software tools, including certain of those mentioned above, and there can be
no assurance that the Company will be able to compete successfully against
them.
6
<PAGE>
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. Many
of the Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company.
As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. In addition, certain of the
Company's principal competitors offer a single vendor solution, since, in the
case of EDA tools companies, they maintain their own EDA design tools and IP
libraries or, in the case of internal design groups, they provide IP
components developed to utilize the qualities of a given manufacturing
process, and may therefore benefit from certain capacity, cost and technical
advantages. The Company's ability to compete successfully in the emerging
market for IP components will depend upon certain factors, many of which are
beyond the Company's control including, but not limited to, success in
designing new products; implementing new designs at smaller process
geometries; access to adequate EDA tools (many of which are licensed from the
Company's current or potential competitors); the price, quality and timing of
new product introductions by the Company and its competitors; the emergence of
new IP component interchangeability standards; the widespread licensing of IP
components by semiconductor manufacturers or their design groups to third
party manufacturers; the ability of the Company to protect its intellectual
property; market acceptance of the Company's IP components; success of
competitive products; market acceptance of products using System-on-a-Chip
ICs; and industry and general economic conditions. There can be no assurance
that the Company will be able to compete successfully in the emerging merchant
IP component market. See "Business--Competition."
DEPENDENCE ON SEMICONDUCTOR MANUFACTURERS; DEPENDENCE ON SEMICONDUCTOR AND
ELECTRONICS INDUSTRIES. The Company's success is substantially dependent both
on the adoption of the Company's technology by semiconductor manufacturers and
on an increasing demand for products requiring complex System-on-a-Chip ICs,
such as portable computing devices, cellular phones, consumer multimedia
products, automotive electronics, personal computers and workstations. The
Company is subject to many risks beyond its control that influence the success
of its customers, including, among others, competition faced by each customer
in its particular industry, market acceptance of the customer's products that
incorporate the Company's technology, the engineering, sales and marketing
capabilities of the customer, and the financial and other resources of the
customer.
The semiconductor and electronics products industries are characterized by
rapid technological change, frequent introductions of new products, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Each of these industries is highly cyclical and has
periodically experienced significant downturns, often in connection with or in
anticipation of declines in general economic conditions during which the
number of new IC design projects often decreases. Revenue from licenses of the
Company's products is influenced by the level of design efforts by its
customers and factors negatively affecting these industries could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may fluctuate in the future from period to period as a consequence
of general economic conditions in the semiconductor and electronics
industries.
DEPENDENCE ON NEW BUSINESS MODEL. The Company has historically generated
revenue from license fees. Beginning in late fiscal 1996, however, the Company
began implementation of a royalty based business model that is intended to
generate revenue from both license fees
7
<PAGE>
and future royalties. The Company is still in the process of implementing this
royalty based business model and, to date, has had only limited success with
its introduction. Certain of the Company's customers, including some of its
largest customers, have initially resisted the adoption of the royalty based
model. There can be no assurance that the Company will be able to complete the
implementation of the royalty based model successfully, or that, when fully
implemented, this model will have the anticipated benefits. The failure of the
Company to implement its new business model successfully could have a material
adverse effect on the Company's business, operating results and financial
condition. To date, the Company has received no royalty revenue, and it does
not anticipate receiving any prior to fiscal 1999 due to the typical length of
time required for the Company to design a component for a customer and for
such customer to manufacture and bring to market a product incorporating such
component. There can be no assurance that the Company will ever receive any
royalty revenue or that, if it does, the amount will be significant. See "--
Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries" and "--Customer Concentration; Limited Customer Base."
The Company believes that its long term success will be substantially
dependent on future royalties. However, even if the Company successfully
implements its new business model, the Company will face risks inherent in
such a model. In particular, the Company's ability to forecast royalty revenue
will be limited by factors that are beyond the Company's ability to control or
assess in advance. Royalties, if any, will be recognized in the quarter in
which the Company receives a royalty report from its customers and will be
dependent upon fluctuating sales volumes. In addition, under the royalty based
business model, the Company's revenue will be dependent upon the sales by its
customers of products that incorporate the Company's technology. Even if the
Company's technology is adopted, there can be no assurance that it will be
used in a product that is ultimately brought to market, achieves commercial
acceptance or results in significant royalties to the Company. The Company
will also face risks relating to the accuracy and completeness of the royalty
collection process. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CUSTOMER CONCENTRATION; LIMITED CUSTOMER BASE. The Company has been
dependent on a relatively small number of customers for a substantial portion
of its annual revenue, although the customers comprising this group have
changed from time to time. In fiscal 1995, SGS-THOMSON, NEC, the United States
Department of Defense (the "DOD"), Samsung Corporation ("Samsung") and LSI
Logic Corporation ("LSI Logic") accounted for 20%, 17%, 17%, 11% and 10% of
revenue, respectively. In fiscal 1996, ATI Technologies, Inc. ("ATI"), SGS-
THOMSON, OKI and the DOD accounted for 37%, 20%, 15% and 10% of revenue,
respectively. In fiscal 1997, SGS-THOMSON, Fujitsu, OKI and NEC accounted for
27%, 24%, 16% and 13% of revenue, respectively. In the quarter ended December
31, 1997, OKI, Fujitsu, ATI, SGS-THOMSON and NEC accounted for 21%, 18%, 17%,
16% and 14% of revenue, respectively. The Company anticipates that its revenue
will continue to depend on a limited number of major customers for the
foreseeable future, although the companies considered to be major customers
and the percentage of revenue represented by each major customer may vary from
period to period depending on the addition of new contracts and the number of
designs utilizing the Company's products. None of the Company's customers has
a written agreement with the Company that obligates it to license future
generations of products or new products, and there can be no assurance that
any customer will license IP components from the Company in the future. In
addition, there can be no assurance that any of the Company's customers will
ship products incorporating the Company's technology or that, if such
shipments occur, they will generate significant revenue. The loss of one or
more of the Company's major customers, reduced orders by one or more of such
customers or the failure of a customer to ship products containing the
Company's IP components could materially adversely affect the Company's
business, operating results and financial condition. See "Business--
Customers."
8
<PAGE>
The Company faces numerous risks in successfully obtaining orders from
customers on terms consistent with the Company's business model, including,
among others, the lengthy and expensive process of building a relationship
with a potential customer before reaching an agreement with such party to
license the Company's products; persuading large semiconductor manufacturers
to work with, to rely for critical technology on, and to disclose proprietary
information to, a smaller company, such as the Company; and persuading
potential customers to bear certain development costs associated with
development of customized components. There are a relatively limited number of
semiconductor manufacturers to which the Company can license its technology in
a manner consistent with its business model and there can be no assurance that
such manufacturers will rely on merchant IP components or adopt the Company's
products. See "--Competition" and "Business--Customers."
PRODUCT CONCENTRATION. The Company derives substantially all of its revenue
from sales of its memory and standard cell products that, together, accounted
for 83%, 79%, 94% and 98% of revenue in fiscal 1995, 1996 and 1997 and the
quarter ended December 31, 1997, respectively. The Company expects that memory
products, in combination with standard cell products, will continue to account
for a significant portion of the Company's revenue, for the foreseeable
future. There can be no assurance that the Company will continue to derive
revenue from memory or standard cell products and a decline in revenue from
such products would have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products. See "--New Product
Development and Technological Change."
LENGTHY SALES CYCLE AND DESIGN PROCESS. The license of the Company's
products typically involves a significant commitment of capital by the
customer and a purchase will often be timed to coincide with a customer's
migration to a new manufacturing process. Potential customers generally commit
significant resources to an evaluation of available IP solutions and require
the Company to expend substantial time, effort and resources to educate them
about the value of the Company's products. A variety of factors, including
factors over which the Company has little or no control, may cause potential
customers to favor an alternate solution or to delay or forego a license of
the Company's products. As a result of these and other factors, the sales
cycle for the Company's products is long, typically ranging from six to 12
months. The Company's ability to forecast the timing and scope of specific
sales is limited, and delay of or failure to complete one or more large
contracts could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to fluctuate significantly from quarter to quarter.
Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the
customer's manufacturing process. This customization is complex and time
consuming and is subject to a number of risks over which the Company has
little or no control, including the customer's adjustments and alterations of
its manufacturing process or the timing of migration to a new process.
Typically, this customization takes from three to six months to complete.
Delays in product customization could have a material adverse effect on the
Company's business, operating results and financial condition and could cause
the Company's operating results to vary significantly from quarter to quarter.
RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS. A substantial portion of the
Company's revenue is derived from customers outside the United States. In
fiscal 1995, 1996 and 1997 and the quarter ended December 31, 1997, revenue
derived from customers outside the United States, primarily in Asia and
Europe, represented approximately 55%, 47%, 67% and 60%, respectively, of the
Company's revenue. The Company anticipates that international revenue
9
<PAGE>
will remain a substantial portion of revenue in the future. To date, all of
the revenue from international customers has been denominated in U.S. dollars.
In the event that the Company's competitors denominate their sales in a
currency that becomes relatively inexpensive in comparison to the U.S. dollar,
the Company may experience fewer orders from international customers whose
business is based primarily on the less expensive currency. To date, the
Company has not experienced any negative impact as a result of the financial
and stock market dislocations that occurred in the Asian financial markets
during 1997; however, there can be no assurance that present or future
dislocations will not have a material adverse effect on the Company's
business, operating results and financial condition. The Company intends to
continue to expand its sales and marketing activities in Asia and Europe. The
Company's expansion of its international business involves a number of risks
including the impact of possible recessionary environments in economies
outside the United States; political and economic instability; exchange rate
fluctuations; longer accounts receivable collection periods; greater
difficulty in accounts receivable collection; unexpected changes in regulatory
requirements; reduced or limited protection for intellectual property rights;
export license requirements; tariffs and other trade barriers and potentially
adverse tax consequences. There can be no assurance that the Company will be
able to sustain or increase revenue derived from international customers or
that the foregoing factors will not have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales, Marketing and Distribution."
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The Company's customers
compete in the semiconductor industry, which is subject to rapid technological
change, frequent introductions of new products, short product life cycles,
changes in customer demands and requirements and evolving industry standards.
The development of new manufacturing processes, the introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Accordingly, the Company's
future success will depend on its ability to continue to enhance its existing
products and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with new product
introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and sale of new or
enhanced products or that such new or enhanced products will achieve market
acceptance. Any delay in release dates of new or enhanced products could
materially adversely affect the Company's business, operating results and
financial condition. The Company could also be exposed to litigation or claims
from its customers in the event that it does not satisfy its delivery
commitments. There can be no assurance that any such claim would not have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Product Development."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part on
the continued contributions of its key management, engineering, sales and
marketing personnel, many of whom are highly skilled and would be difficult to
replace. None of the Company's senior management or key technical personnel is
bound by an employment contract. In addition, the Company does not currently
maintain key man life insurance covering its key personnel. The Company
believes that its success depends to a significant extent on the ability of
its management to operate effectively, both individually and as a group.
Certain of the
10
<PAGE>
Company's senior management have only recently joined the Company and there
can be no assurance they and other newly hired employees will be assimilated
into the Company successfully. The Company must also attract and retain highly
skilled managerial, engineering, sales and marketing and finance personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel. The
loss of the services of any of the key personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Employees" and "Management--Executive Officers and Directors."
MANAGEMENT OF GROWTH. The ability of the Company to license its products and
manage its business successfully in a rapidly evolving market requires an
effective planning and management process. The Company's rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. From September 30,
1996 to December 31, 1997, the Company grew from 28 to 72 fulltime employees.
The Company's customers rely heavily on the Company's technological expertise
in designing, testing and manufacturing products incorporating the Company's
IP components. Relationships with new customers generally require significant
engineering support. As a result, any increase in the demand for the Company's
products will increase the strain on the Company's personnel, particularly its
engineers. The Company's financial and management controls, reporting systems
and procedures are also limited. Although some new controls, systems and
procedures have been implemented, the Company's future growth, if any, will
depend on its ability to continue to implement and improve operational,
financial and management information and control systems on a timely basis,
together with maintaining effective cost controls and any failure to do so
would have a material adverse effect on the Company's business, operating
results and financial condition. Further, the Company will be required to
manage multiple relationships with various customers and other third parties
and must successfully implement its new business model. There can be no
assurance that the Company's systems, procedures or controls will be adequate
to support the Company's operations or that the Company's management will be
able to achieve the rapid execution necessary to offer its services and
products successfully and to implement its business plan. The Company's
inability to manage any future growth effectively would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Employees" and "Management."
RISKS ASSOCIATED WITH PROTECTION OF INTELLECTUAL PROPERTY. The Company
relies primarily on a combination of nondisclosure agreements and other
contractual provisions and patent, trademark, trade secret and copyright law
to protect its proprietary rights. Failure of the Company to enforce its
patents, trademarks or copyrights or to protect its trade secrets could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that such intellectual property
rights can be successfully asserted in the future or will not be invalidated,
circumvented or challenged. From time to time, third parties, including
competitors of the Company, may assert patent, copyright and other
intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by
third parties will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third parties on commercially reasonable terms. Litigation,
regardless of the outcome, could result in substantial cost and diversion of
resources of the Company. Any infringement claim or other litigation against
or by the Company could materially adversely affect the Company's business,
operating results and financial condition.
11
<PAGE>
In certain instances, the Company has elected to rely on trade secret law
rather than patent law to protect its proprietary technology. However, trade
secrets are difficult to protect. The Company seeks to protect its proprietary
technology and processes, in part, by confidentiality agreements with its
employees and customers. There can be no assurance that these contracts will
not be breached, that the Company will have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries.
In addition, there can be no assurance that competitors of the Company, many
of which have substantial resources and have made substantial investments in
competing technologies, do not have, or will not seek to apply for and obtain,
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the United States Patent and Trademark Office
("USPTO") to determine the priority of inventions. The defense and prosecution
of intellectual property suits, USPTO interference proceedings and related
legal and administrative proceedings are both costly and time consuming. Any
such suit or proceeding involving the Company could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Patents and Intellectual Property Protection."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company intends
to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs
and timing of expansion of product development efforts and the success of
these development efforts, the costs and timing of expansion of sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims
and other intellectual property rights, the level and timing of license
revenue, available borrowings under line of credit arrangements and other
factors. The Company believes that the proceeds from this Offering, together
with the Company's current cash balances and any cash generated from
operations and from available or future debt financing, will be sufficient to
meet the Company's operating and capital requirements for at least the next 12
months. However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company's forecast period of
time through which its financial resources will be adequate to support its
operations implies assumptions about its business that are forward looking and
that involve risks and uncertainties, and actual results could vary. The
factors described in this paragraph will affect both the Company's future
capital requirements and the adequacy of its available funds. The Company may
be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such funding, if needed, will be available on terms attractive to the Company,
or at all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies or
products. The failure of the Company to raise capital when needed could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE. Prior to this Offering, there has been no public market for the
Company's Common Stock, and there can be
12
<PAGE>
no assurance that an active public market will develop or that, if one does
develop, it will be maintained. The initial public offering price, which will
be determined through negotiations between the Company and the Underwriters,
may not be indicative of the market price of the Common Stock after the
Offering. In addition, the securities markets have from time to time
experienced significant price and volume fluctuations that are unrelated and
disproportionate to the operating performance of particular companies. The
market prices of the common stock of many publicly traded companies have in
the past been, and can in the future be expected to be, especially volatile.
The market price of the Company's Common Stock is likely to be highly volatile
and may be subject to wide fluctuations in response to announcements of
technological innovations or new products by the Company, its customers or its
competitors, release of reports by securities analysts, developments or
disputes concerning patents or proprietary rights, economic and other external
factors, as well as period to period fluctuations in the Company's financial
results. See "Underwriting."
CONCENTRATION OF OWNERSHIP. The Company's founders, officers, directors and
their affiliates will, in the aggregate, beneficially own approximately 64.4%
of the Company's outstanding Common Stock following the completion of this
Offering (61.1% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, acting together, would effectively be
able to control substantially all matters requiring approval by the
stockholders, including the election of directors. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Principal Stockholders."
CERTAIN ANTI-TAKEOVER PROVISIONS. Upon the closing of this Offering, the
Board of Directors of the Company will have the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the rights, preferences,
privileges and restrictions, including voting rights, of such shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current
plans to issue shares of Preferred Stock. In addition, Section 203 of the
Delaware General Corporation Law ("Section 203") restricts certain business
combinations with any "interested stockholder" as defined by such statute. In
addition, the Company's Certificate of Incorporation and Bylaws that will be
in effect upon the closing of this Offering will contain certain other
provisions that may have the effect of delaying, deferring or preventing a
change of control of the Company including cumulative voting for the election
of directors, the elimination of actions by written consent of stockholders
and the establishment of an advance notice procedure for stockholder proposals
and director nominations to be acted upon at annual meetings of the
stockholders. These provisions are designed to encourage potential acquirors
to negotiate with the Company's Board of Directors and give the Board of
Directors sufficient opportunity to consider various alternatives to maximize
stockholder value. These provisions are also intended to discourage certain
tactics that may be used in proxy contests. However, issuance of Preferred
Stock, charter and bylaw provisions or restrictions from Section 203 could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company and, as a consequence, they also may adversely
affect the market price of the Company's Common Stock. Such provisions may
also have the effect of preventing changes in the management of the Company.
See "Description of Capital Stock--Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this Offering could adversely
affect the market price of the Common Stock prevailing from time to time. The
number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as
13
<PAGE>
amended (the "Securities Act"), and lock-up agreements executed by officers,
directors, optionholders and substantially all stockholders of the Company
under which such security holders have agreed not to sell or otherwise dispose
of any of their shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Deutsche Morgan Grenfell Inc.
In addition to the 2,900,000 shares of Common Stock offered hereby (assuming
no exercise of the Underwriters' over-allotment option), there will be
9,174,075 shares of Common Stock outstanding as of the date of this
Prospectus, all of which are "restricted" shares under the Securities Act. As
a result of the lock-up agreements described above and the provisions of Rules
144(k), 144 and 701 promulgated under the Securities Act ("Rule 144(k)," "Rule
144" and "Rule 701," respectively), the restricted shares will be available
for sale in the public market as follows: (i) no shares will be eligible for
immediate sale on the date of this Prospectus, (ii) approximately 9,124,075
shares will become eligible for sale 180 days after the date of this
Prospectus (assuming no release from the lock-up agreements) upon expiration
of lock-up agreements and (iii) approximately 50,000 shares will become
eligible for sale one year after the date of this Prospectus. After this
Offering, the holders of approximately 3,435,736 shares of Common Stock
issuable upon conversion of Preferred Stock or exercise of a warrant will be
entitled to certain demand and piggyback rights with respect to registration
of such shares under the Securities Act. If such holders, by exercising their
demand registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
to initiate a registration and include shares held by such holders pursuant to
the exercise of their piggyback registration rights, such sales might have an
adverse effect on the Company's ability to raise capital. See "Shares Eligible
for Future Sale" and "Underwriting."
DISCRETION AS TO USE OF PROCEEDS. Although the Company currently intends to
apply the net proceeds of this Offering in the manner described under "Use of
Proceeds," it has broad discretion within such proposed uses as to the
allocation of the net proceeds, the timing of expenditures and all other
aspects relating to the application of such proceeds. The majority of the net
proceeds has not been allocated to any specific purpose and the Company
reserves the right to reallocate that portion of the net proceeds of this
Offering that has specifically been allocated as management, in its
discretion, deems necessary or advisable. There can be no assurance that the
actual allocation of the Offering proceeds will not differ materially from
their current or anticipated use.
ABSENCE OF DIVIDENDS; IMMEDIATE AND SUBSTANTIAL DILUTION. The Company does
not anticipate paying any dividends in the foreseeable future. See "Dividend
Policy." Investors participating in this Offering will incur immediate and
substantial dilution in the net tangible book value of their shares of Common
Stock. Additional dilution will occur upon the exercise of outstanding stock
options or warrants. See "Dilution."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,900,000 shares of
Common Stock offered hereby are estimated to be approximately $20,726,000
(approximately $21,209,600 if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $8.00 per
share and after deducting the estimated underwriting discount and offering
expenses. The principal purposes of this Offering are to obtain additional
capital, to create a public market for the Company's Common Stock and to
facilitate future access by the Company to public equity markets.
The Company ultimately expects to use the net proceeds from this Offering
for general corporate purposes, including working capital and capital
expenditures. The Company anticipates spending at least $850,000 for equipment
lease and office lease payments and approximately $3.4 million for capital
expenditures over the next 12 months, of which approximately $900,000 will be
for software tools, approximately $735,000 will be for computer equipment
relating to the Company's network and servers, approximately $525,000 will be
for personal computers for new employees and approximately $1,200,000 will be
for building improvements. As of the date of this Prospectus, the Company has
no specific plans regarding the use of the remainder of the net proceeds of
this Offering. A portion of the proceeds may also be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. Although the Company evaluates such potential
acquisitions from time to time, the Company has no present understandings,
commitments or agreements with respect to any material acquisitions of other
businesses, products or technologies. Pending such uses, the Company intends
to invest the net proceeds received by it from this Offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
Since March 1996, when the Company converted to a C corporation from a
subchapter S corporation, the Company has not declared or paid any cash
dividends on its Common Stock or other securities. The Company presently
intends to retain future earnings, if any, for use in the operation and
expansion of its business and does not anticipate paying cash dividends in the
foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock and the issuance of 50,000 shares of Common Stock upon
the exercise of a warrant that expires automatically upon the closing of this
Offering, and (iii) the pro forma capitalization of the Company as adjusted to
give effect to the sale of the 2,900,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $8.00 per share and after
deducting the estimated underwriting discount and offering expenses. This
table should be read in conjunction with the Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long term obligations, net of current portion(1).. $ 47 $ 47 $ 47
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value;
3,435,736 shares authorized actual and pro
forma; 5,000,000 shares authorized as adjusted,
3,385,736 issued and outstanding, actual; none
issued and outstanding, pro forma and as
adjusted....................................... 7,564 -- --
Common Stock, $0.001 par value; 50,000,000
shares authorized, 5,738,339 shares issued and
outstanding actual; 9,174,075 shares issued and
outstanding pro forma and 12,074,075 shares
issued and outstanding as adjusted(2).......... 6 9 12
Warrant......................................... 125 -- --
Additional paid in capital...................... 654 8,340 29,063
Retained earnings............................... 1,225 1,225 1,225
------ ------ -------
Total stockholders' equity.................... 9,574 9,574 30,300
------ ------ -------
Total capitalization........................ $9,621 $9,621 $30,347
====== ====== =======
</TABLE>
- --------
(1) Long term obligations consist of deferred rent. See Note 8 of Notes to
Financial Statements.
(2) Excludes as of December 31, 1997 (i) 1,401,411 shares of Common Stock
issuable upon the exercise of outstanding options under the 1993 Plan with
a weighted average exercise price of $2.06 per share and 2,072,259 shares
of Common Stock reserved for future issuance thereunder, (ii) 600,000
shares of Common Stock reserved for issuance under the Purchase Plan and
(iii) 200,000 shares of Common Stock reserved for issuance under the
Director Plan. See "Management--Stock Plans," "Description of Capital
Stock" and Notes 9 and 14 of Notes to Financial Statements. On January 12,
1998, the Company granted options to purchase 491,700 shares and 240,000
shares of Common Stock at exercise prices of $7.00 and $7.70 per share,
respectively, and, therefore, as of January 12, 1998, 2,103,549 shares of
Common Stock were issuable upon the exercise of outstanding options under
the 1993 Plan with a weighted average exercise price of $3.89 per share,
and 1,340,559 shares of Common Stock were reserved for future issuance
thereunder.
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<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1997 was $9.6
million, or $1.02 per share of Common Stock. Net tangible book value per share
represents the amount of total tangible assets of the Company less total
liabilities plus an aggregate exercise price of $34,000 relating to the
purchase of 289,567 shares of Common Stock under currently exercisable options
divided by the total number of shares of Common Stock outstanding plus such
exercisable options (assuming the conversion of all outstanding shares of
Preferred Stock into Common Stock). After giving effect to the sale by the
Company of the 2,900,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $8.00 per share (after deducting the
estimated underwriting discount and offering expenses), the adjusted pro forma
net tangible book value as of December 31, 1997 would have been approximately
$30.3 million, or $2.45 per share. This represents an immediate increase in
net tangible book value per share of Common Stock of $1.43 to existing
stockholders and an immediate dilution in net tangible book value of $5.55 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $8.00
Net tangible book value per share as of December 31, 1997...... $1.02
Increase per share attributable to new investors............... 1.43
-----
Adjusted pro forma net tangible book value per share after this
Offering........................................................ 2.45
-----
Dilution per share to new investors.............................. $5.55
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the number of shares of Common Stock purchased from the Company (after
giving effect to the purchase of 289,567 shares of Common Stock under
currently exercisable options with an aggregate exercise price of $34,000 and
assuming the conversion of all outstanding Preferred Stock into Common Stock),
the total consideration paid and the average price per share paid by the
existing stockholders and by new investors purchasing shares in this Offering
at an assumed initial public offering price of $8.00 per share (before
deducting the estimated underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,463,642 76.5% $ 8,383,000 26.5% $0.89
New investors.............. 2,900,000 23.5 23,200,000 73.5 8.00
------------ ------- ----------- -----
Total.................... 12,363,642 100.0% $31,583,000 100.0%
============ ======= =========== =====
</TABLE>
- -------
(1) The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable within 30 days of the date of this Prospectus, to
purchase up to an aggregate of 435,000 shares of Common Stock at the
initial public offering price less the underwriting discount, solely to
cover over-allotments, if any. In the event the Underwriters' over-
allotment option is exercised in full, sales by such Selling Stockholders
would reduce the number of shares of Common Stock held by existing
stockholders to 9,093,642 or approximately 73.2% of the total number of
shares of Common Stock outstanding after this Offering and will increase
the number of shares held by new investors to 3,335,000 or approximately
26.8% of the total number of shares of Common Stock outstanding after this
Offering. See "Principal Stockholders" and "Underwriting."
The foregoing analysis assumes (i) no exercise of the Underwriters' over-
allotment option, (ii) issuance of 50,000 shares of Common Stock upon the
exercise of a warrant that expires automatically upon the closing of this
Offering, (iii) no exercise of unvested options after December 31, 1997 and
(iv) the conversion of all outstanding shares of Preferred Stock into Common
Stock. As of December 31, 1997, there were outstanding unvested options to
purchase an aggregate of 1,111,844 shares of Common Stock at a weighted
average exercise price of $2.57 per share. On January 12, 1998, the Company
granted options to purchase 491,700 shares and 240,000 shares of Common Stock
at exercise prices of $7.00 and $7.70 per share, respectively, and, therefore,
as of January 12, 1998, 2,103,549 shares of Common Stock were issuable upon
the exercise of outstanding options under the 1993 Plan with a weighted
average exercise price of $3.89 per share, and 1,340,559 shares of Common
Stock were reserved for future issuance thereunder. To the extent that
unvested options are exercised, there will be further dilution to new
investors. See "Management--Stock Plans," "Description of Capital Stock" and
Note 9 of Notes to Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and Notes thereto included
elsewhere in this Prospectus. The balance sheet data as of September 30, 1996
and 1997 and the statement of operations data for the fiscal years ended
September 30, 1995, 1996 and 1997 are derived from the financial statements
that have been audited by Coopers & Lybrand L.L.P., independent accountants,
included elsewhere in this Prospectus. The balance sheet data as of
September 30, 1995 is derived from the financial statements that have been
audited by Coopers & Lybrand L.L.P., independent accountants, not included in
this Prospectus. The balance sheet data as of December 31, 1997 and the
statement of operations data for the quarters ended December 31, 1996 and 1997
are derived from unaudited financial statements included elsewhere in this
Prospectus. The balance sheet data as of September 30, 1993 and 1994 and as of
December 31, 1996 and the statement of operations data for the fiscal years
ended September 30, 1993 and 1994 are derived from unaudited financial
statements not included in this Prospectus. All unaudited financial statements
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations for such periods.
Historical results are not necessarily indicative of results to be expected in
the future.
<TABLE>
<CAPTION>
QUARTER
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------ -------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue..................... $1,262 $2,768 $2,718 $4,147 $8,912 $1,385 $3,329
Cost and expenses:
Cost of revenue........... 388 910 984 1,280 2,855 425 1,024
Product development....... 434 847 1,044 1,080 1,914 352 831
Sales and marketing....... 93 314 272 603 2,019 353 785
General and
administrative........... 98 304 415 611 1,340 185 455
------ ------ ------ ------ ------ ------ ------
Total cost and expenses. 1,013 2,375 2,715 3,574 8,128 1,315 3,095
------ ------ ------ ------ ------ ------ ------
Operating income............ 249 393 3 573 784 70 234
Other income (expense) net.. 1 (3) -- 96 297 42 115
------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes............... 250 390 3 669 1,081 112 349
Provision for income taxes.. -- -- 36 137 356 37 130
------ ------ ------ ------ ------ ------ ------
Net income (loss)........... $ 250 $ 390 $ (33) $ 532 $ 725 $ 75 $ 219
====== ====== ====== ====== ====== ====== ======
Diluted earnings per share
(historical)............... $ 0.08 $ 0.01 $ 0.02
====== ====== ======
Pro forma net income data
(unaudited)(1):
Pro forma net income...... $ 175 $ 274 $ 21 $ 409
====== ====== ====== ======
Diluted earnings per share
(pro forma).............. $ 0.03 $ 0.05 $ 0.00 $ 0.05
====== ====== ====== ======
Weighted average shares
outstanding (diluted)(2)... 5,827 5,832 5,945 7,937 9,528 9,231 9,705
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
--------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
---- ------ ------ ------ ------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities.......... $ 1 $ 80 $ 6 $2,958 $ 4,554 $ 3,536
Working capital................. 276 450 141 2,268 4,352 4,009
Total assets.................... 669 2,524 1,261 5,172 12,011 13,477
Long term liabilities, net of
current portion(3)............. -- -- -- 15 49 241
Total stockholders' equity...... 264 587 410 4,292 9,348 9,574
</TABLE>
- --------
(1) Prior to March 1996, the Company was a subchapter S corporation and,
therefore, was not subject to entity level taxation. Pro forma net income
includes pro forma tax expense as if the Company was taxed as a C
corporation from fiscal 1993 to 1996.
(2) For an explanation of net income (loss) per share and shares used in per
share calculations, see Note 14 of Notes to Financial Statements included
elsewhere in this Prospectus.
(3) Long term liabilities consist of deferred rent and deferred revenue. See
Note 8 of Notes to Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. Certain
statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward looking statements. The
forward looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward looking statements. For
a more detailed discussion of these and other business risks, see "Risk
Factors."
OVERVIEW
Artisan is a leading developer of high performance, low power and high
density embedded memory and other IP components for the design and manufacture
of complex ICs. The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used
in complex, high volume applications, such as portable computing devices,
cellular phones, consumer multimedia products, automotive electronics,
personal computers and workstations.
Revenue consists of license fees for the Company's IP component products.
Typically, a customer licenses one or more products that are accompanied by
layout databases, views to support a customer's IC design tool environment and
design methodology documentation. The license of the Company's products
typically involves a sales cycle of six to 12 months and often coincides with
a customer's migration to a new manufacturing process. The Company's contracts
generally require a customer to pay a license fee to Artisan ranging from
approximately $400,000 to $800,000 for each product delivered under a
contract. A contract typically calls for an upfront payment of approximately
one third of the full contract value with the remainder due upon delivery,
generally three to six months later. See "Risk Factors--Lengthy Sales Cycle
and Design Process."
To date, the substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated
losses on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period for a
project ranges from three to six months, revenue in any quarter is dependent
on the Company's progress toward completion of the project. There can be no
assurance that the Company's estimates will be accurate, and, in the event
they are not, the Company's business, operating results and financial
condition in subsequent periods could be materially adversely affected.
Currently, license fees represent substantially all of revenue. Beginning in
late fiscal 1996, however, the Company began implementation of a royalty based
business model that is intended to generate revenue from both license fees and
future royalties. Royalties will be based on per unit sales of ICs and will
generally be based on the silicon area of an IC occupied by the Company's IP
components. To date, the Company has received no royalty revenue, and it does
not anticipate receiving any until fiscal 1999 due to the typical length of
time required for the Company to design a component for a customer and for
such customer to manufacture and bring to market a product incorporating such
component. There can be no assurance that the Company will be successful in
expanding the number of royalty bearing contracts with customers. The Company
generally licenses its products on a nonexclusive, worldwide basis to major
semiconductor manufacturers and grants these manufacturers the right to
distribute the Company's IP components freely to their internal design teams
and to fabless semiconductor companies that manufacture at the same facility.
Given that Artisan provides its products early
19
<PAGE>
in the customer's IC design process, there will be a significant delay between
the delivery of a product and the generation of royalty revenue. There can be
no assurance that the Company will receive any royalty revenue or that, if it
does, the amount will be significant. See "Risk Factors--Dependence on New
Business Model."
The Company has been dependent on a relatively small number of customers for
a substantial portion of its annual revenue, although the customers comprising
this group have changed from time to time. In fiscal 1995, SGS-THOMSON, NEC,
the DOD, Samsung and LSI Logic accounted for 20%, 17%, 17%, 11% and 10% of
revenue, respectively. In fiscal 1996, ATI, SGS-THOMSON, OKI and the DOD
accounted for 37%, 20%, 15% and 10% of revenue, respectively. In fiscal 1997,
SGS-THOMSON, Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of
revenue, respectively. In the quarter ended December 31, 1997, OKI, Fujitsu,
ATI, SGS-THOMSON and NEC accounted for 21%, 18%, 17%, 16% and 14% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although
the companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the
Company's products. See "Risk Factors--Customer Concentration; Limited
Customer Base" and "Business--Customers."
A substantial portion of the Company's revenue is derived from customers
outside the United States. In fiscal 1995, 1996 and 1997 and the quarter ended
December 31, 1997, revenue from customers outside the United States, primarily
in Asia and Europe, represented approximately 55%, 47%, 67% and 60%,
respectively of the Company's revenue. The Company anticipates that
international revenue will remain a substantial portion of its revenue in the
future. To date, all of the revenue from international customers has been
denominated in U.S. dollars. See "Risk Factors--Risks Associated with
International Customers" and Note 11 of Notes to Financial Statements.
The Company derives substantially all of its revenue from sales of its
memory and standard cell products that, together, accounted for 83%, 79%, 94%
and 98% of revenue in fiscal 1995, 1996 and 1997 and the quarter ended
December 31, 1997, respectively. The Company expects that memory products, in
combination with standard cell products, will continue to account for a
significant portion of the Company's revenue, for the foreseeable future.
There can be no assurance that the Company will continue to derive revenue
from memory or standard cell products and a decline in revenue from such
products would have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products.
Since the Company's inception in April 1991, each of the Company's cost and
expense categories has progressively increased as the Company has added
personnel and increased its activities in these areas. The Company intends to
continue making significant expenditures associated with engineering costs and
sales and marketing, and expects that these costs and expenses will continue
to be a significant percentage of revenue in future periods. Whether such
expenses increase or decrease as a percentage of revenue will be substantially
dependent upon the rate of change of the Company's revenue. See Note 2 of
Notes to Financial Statements.
The Company in the past has experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve such progress could result in damage
to customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
20
<PAGE>
business, operating results and financial condition. In addition, the
Company's contracts with customers may generally be canceled without cause,
and if a customer cancels or delays performance under any such contracts, the
Company's business, operating results and financial condition could be
materially adversely affected. The Company's costs and expenses will be based
in part on the Company's expectations of future revenue from license fees.
Accordingly, if the Company does not realize its expected revenue, its
business, operating results and financial condition could be materially
adversely affected. See "Risk Factors--Fluctuations in Operating Results."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statements
of operations data as a percentage of revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------- --------------
1995 1996 1997 1996 1997
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of revenue............... 36.2 30.9 32.0 30.7 30.7
Product development........... 38.4 26.0 21.5 25.4 25.0
Sales and marketing........... 10.0 14.6 22.7 25.5 23.6
General and administrative.... 15.3 14.7 15.0 13.3 13.7
-------- -------- -------- ------ ------
Total cost and expenses..... 99.9 86.2 91.2 94.9 93.0
-------- -------- -------- ------ ------
Operating income................ 0.1 13.8 8.8 5.1 7.0
Other income, net............... -- 2.3 3.3 3.0 3.5
-------- -------- -------- ------ ------
Income before provision for
income taxes................... 0.1 16.1 12.1 8.1 10.5
Provision for income taxes...... 1.3 3.3 4.0 2.7 3.9
-------- -------- -------- ------ ------
Net income (loss)............... (1.2)% 12.8% 8.1% 5.4% 6.6%
======== ======== ======== ====== ======
Pro forma net income data:
Income before provision for
income taxes................. 0.1 16.1
Pro forma income tax benefit
(expense).................... 0.6 (6.3)
-------- --------
Pro forma net income.......... 0.7% 9.8%
======== ========
</TABLE>
QUARTERS ENDED DECEMBER 31, 1996 AND 1997
Revenue
Revenue increased by 140.4% from $1.4 million in the first quarter of fiscal
1997 to $3.3 million in the first quarter of fiscal 1998. The growth in
revenue in the first quarter of fiscal 1998 as compared with the same period
in fiscal 1997 was primarily attributable to increased licensing of the
Company's memory and standard cell products, which more than offset a
relatively small decline in the sale of I/O products.
Cost and Expenses
Engineering costs are allocated between cost of revenue and product
development expenses. Engineering efforts devoted to developing products for
specific customer projects are recognized as cost of revenue. The balance of
engineering costs, incurred for general development of Artisan's technology,
is charged to product development. Engineering costs are generally charged as
incurred and do not necessarily correspond to the recognition of revenue under
related contracts. Engineering costs increased by 138.7% from $777,000 in the
first
21
<PAGE>
quarter of fiscal 1997 to $1.9 million in the first quarter of fiscal 1998.
Engineering costs as a percentage of revenue declined slightly from 56.1% in
the first quarter of fiscal 1997 to 55.7% for the first quarter of fiscal
1998. The absolute dollar increase in engineering costs in the first quarter
of fiscal 1998, as compared with the same period in fiscal 1997, was due
primarily to an increase in engineering personnel and, to a lesser extent,
purchases of computer equipment, software tools and networking infrastructure
and equipment and legal costs associated with the Company's patent program.
COST OF REVENUE. Cost of revenue increased by 140.9% from $425,000 in the
first quarter of fiscal 1997 to $1.0 million in the first quarter of fiscal
1998. Cost of revenue as a percentage of revenue remained constant at 30.7%
for the first quarters of both fiscal 1997 and 1998. The absolute dollar
increase in cost of revenue in the first quarter of fiscal 1998, as
compared with the same period of fiscal 1997, was due to increases in
headcount and costs associated with delivering product to, and supporting,
a growing customer base.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased by
136.1% from $352,000 in the first quarter of fiscal 1997 to $831,000 in the
first quarter of fiscal 1998. As a percentage of revenue product
development expenses remained relatively constant at 25.4% and 25.0% for
the first quarters of fiscal 1997 and 1998, respectively. The absolute
dollar increase in product development expenses in the first quarter of
fiscal 1998, as compared with the same period in fiscal 1997, was
attributable to an increase in engineering personnel and, to a lesser
extent, purchases of computer equipment, software tools and networking
infrastructure and equipment and legal costs associated with the Company's
patent program.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
salaries, commissions, travel expenses and costs associated with trade
shows, advertising and other marketing efforts. Costs of pre-sale customer
support are also charged to sales and marketing. Sales and marketing
expenses increased by 122.4% from $353,000 in the first quarter of fiscal
1997 to $785,000 in the first quarter of fiscal 1998. Sales and marketing
expense as a percentage of revenue decreased from 25.5% for the first
quarter of fiscal 1997 to 23.6% for the first quarter of fiscal 1998. The
increase in absolute dollars in sales and marketing expenses in the first
quarter of fiscal 1998, as compared with the same period in fiscal 1997,
was primarily attributable to increases in sales headcount and commissions
expense to support an expanded customer coverage model and increases in
marketing headcount and promotional activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 145.9% from $185,000 in the first quarter of fiscal 1997 to
$455,000 in the first quarter of fiscal 1998. As a percentage of revenue
general and administrative expenses remained relatively constant at 13.4%
and 13.7% in the first quarters of fiscal 1997 and 1998, respectively. The
absolute dollar increases in general and administrative expenses in the
first quarter of fiscal 1998, as compared with the same period in fiscal
1997, was primarily due to increases in general and administrative
personnel and increases in professional services fees.
Other Income
Other income increased by 173.8% from $42,000 in the first quarter of fiscal
1997 to $115,000 in the first quarter of fiscal 1998. Other income as a
percentage of revenue remained relatively constant at 3.0% and 3.5% for the
first quarters of fiscal 1997 and 1998, respectively. The growth in other
income in the first quarter of fiscal 1998, as compared with the same period
in fiscal 1997, reflects interest income earned on the proceeds from previous
equity financings and cash generated from operations over the prior twelve
month period.
22
<PAGE>
Income Taxes
The provision for income taxes was $37,000 and $130,000 in the first
quarters of fiscal 1997 and 1998, respectively. The effective tax rate
increased to 37.2% in the first quarter of fiscal 1998, as compared with 33.0%
in the first quarter of fiscal 1997. The change in effective tax rate for the
respective periods was primarily due to the higher proportion of foreign
source income and the increase in overall income.
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
Revenue
Revenue increased by 52.6% from $2.7 million in fiscal 1995 to $4.1 million
in fiscal 1996 and by 114.9% to $8.9 million in fiscal 1997. The growth in
revenue in 1996 was primarily attributable to increased licensing of the
Company's standard cell products and, to a lesser extent, I/O products,
partially offset by a reduction in license revenue from memory products. The
increase in revenue in fiscal 1997 resulted primarily from increases in the
number of licenses of, and prices for, the Company's memory products and, to a
lesser extent, from increases in the number of licenses of, and prices for,
standard cell products. The increase in the number of licenses for standard
cell products in fiscal 1996 and memory products in fiscal 1997 corresponded
to the introduction of new products in each category.
Cost and Expenses
Engineering costs increased by 16.4% from $2.0 million in fiscal 1995 to
$2.4 million in fiscal 1996 and by 102.1% to $4.8 million in fiscal 1997.
Engineering costs as a percentage of revenue were 74.6%, 56.9% and 53.5% for
fiscal 1995, 1996 and 1997, respectively. The increase in the level of
engineering costs was due primarily to an increase in engineering personnel,
and the decrease as a percentage of revenue stemmed from revenue growth in
excess of the growth in engineering expenses.
Cost of Revenue. Cost of revenue increased by 30.1% from $984,000 in
fiscal 1995 to $1.3 million in fiscal 1996 and by 123.0% to $2.9 million in
fiscal 1997. As a percent of revenue, cost of revenue was 36.2%, 30.9% and
32.0% for fiscal 1995, 1996 and 1997, respectively. The increases in
absolute dollars in fiscal 1996 and 1997 were due to increases in headcount
and costs associated with customer support for a growing customer base and
the decrease as a percentage of revenue was the result of revenue growth in
excess of the growth in cost of revenue.
Product Development Expenses. Product development expenses increased by
3.4% from $1.0 million in fiscal 1995 to $1.1 million 1996 and by 77.2% to
$1.9 million in fiscal 1997. Product development expenses as a percentage
of revenue were 38.4%, 26.0% and 21.5% for fiscal 1995, 1996 and 1997,
respectively. The increase in absolute dollars from fiscal 1996 to fiscal
1997 was attributable to increased headcount and infrastructure
investments, including workstations and EDA tool purchases necessary for
the development of a new generation of high speed memory products and
enhancements to the Company's standard cell product. The decrease in
product development expenses as a percentage of revenue during these
periods was primarily the result of the growth in revenue. The Company
expects that product development expenses will continue to increase in
absolute dollars. Whether such expenses increase or decrease as a
percentage of revenue will be substantially dependent upon the rate of
change of the Company's revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased by
121.7% from $272,000 in fiscal 1995 to $603,000 in fiscal 1996 and by
234.8% to $2.0 million in fiscal 1997. Sales and marketing expenses as a
percentage of revenue were 10.0%, 14.6% and
23
<PAGE>
22.7% for fiscal 1995, 1996 and 1997, respectively. The growth in sales and
marketing expenses in absolute dollars was primarily attributable to
increased trade show participation and headcount as well as, in fiscal
1997, advertising and costs associated with the Company's name change. The
increases in sales and marketing expenses as a percentage of revenues was
due to expense growth in this category which exceeded the growth of
revenue. The Company expects sales and marketing expenses to increase in
absolute dollars in the future as the Company increases headcount to expand
account coverage and provide increased customer support. The rate of
increase of, and the percentage of revenue represented by, sales and
marketing expenses in the future will vary from period to period based on
the trade show, advertising, promotional and other sales and marketing
activities undertaken, the change in sales and marketing headcount in any
given period and the rate of change in the Company's revenue.
General and Administrative Expenses. General and administrative expenses
increased by 47.2% from $415,000 in fiscal 1995 to $611,000 in fiscal 1996
and by 119.3% to $1.3 million in fiscal 1997. General and administrative
expenses as a percentage of revenue were 15.3%, 14.7% and 15.0% for fiscal
1995, 1996 and 1997, respectively. Absolute dollar increases in general and
administrative expenses during these periods are the result of increases in
headcount and in legal, accounting and other professional expenses. Changes
in the percentage of revenues represented by general and administrative
expenses were due to changes in the growth of revenues for the respective
periods. The Company expects general and administrative expenses to grow in
absolute dollars in future periods as the Company expands its operations
and as a result of expenses associated with being a public company. The
rate of increase of and the percentage of revenue represented by general
and administrative expenses in the future will depend on the rate of change
of the Company's revenue.
Other Income
Other income increased from zero in 1995 to $96,000 in fiscal 1996 and by
209.4% to $297,000 in fiscal 1997. Other income as a percentage of revenue was
0%, 2.3% and 3.3% in fiscal 1995, 1996 and 1997, respectively. The growth in
other income in fiscal 1996 and 1997 reflects interest income earned on the
proceeds of the Company's Series A and Series B Preferred Stock financings in
March 1996 and December 1996, respectively.
Income Taxes
The provision for income taxes was $36,000, $137,000 and $356,000 in fiscal
1995, 1996 and 1997, respectively. The Company's effective tax rate was 32.9%
in fiscal 1997. Prior to March 1996, the Company was a subchapter S
corporation and, therefore, was not subject to entity level taxation. Fiscal
1995 taxes consist of foreign income and franchise taxes. In March 1996, the
Company converted to a C corporation and thereafter has been a cash basis
taxpayer for federal and state income tax purposes. Pro forma net income
includes pro forma tax expense as if the Company was taxed as a C corporation
in fiscal 1995 and 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results in absolute dollar
amounts and as a percentage of revenue for each quarter of fiscal 1997 and the
first quarter of fiscal 1998. In the opinion of management, this information
has been presented on the same basis as the audited financial statements
appearing elsewhere in this Prospectus, and all necessary adjustments,
representing only normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited quarterly results when
read in conjunction with the
24
<PAGE>
audited financial statements of the Company. Results of operations for any
quarter are not necessarily indicative of the results to be expected for the
entire fiscal year or for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1997 1997 1997 1997
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue.......................... $1,385 $1,770 $2,738 $3,019 $3,329
Cost and expenses:
Cost of revenue................ 425 501 937 992 1,024
Product development............ 352 472 477 613 831
Sales and marketing............ 353 351 620 695 785
General and administrative..... 185 316 415 424 455
------ ------ ------ ------ ------
Total cost and expenses...... 1,315 1,640 2,449 2,724 3,095
------ ------ ------ ------ ------
Operating income................. 70 130 289 295 234
Other income..................... 42 90 87 78 115
------ ------ ------ ------ ------
Income before provision for
income taxes.................... 112 220 376 373 349
Provision for income taxes....... 37 72 124 123 130
------ ------ ------ ------ ------
Net income....................... $ 75 $ 148 $ 252 $ 250 $ 219
------ ------ ------ ------ ------
Diluted earnings per share....... $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.02
====== ====== ====== ====== ======
Shares used in per share
calculation..................... 9,231 9,532 9,671 9,680 9,705
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUE
---------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1997 1997 1997 1997
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of revenue................ 30.7 28.3 34.2 32.9 30.7
Product development............ 25.4 26.7 17.4 20.3 25.0
Sales and marketing............ 25.5 19.8 22.6 23.0 23.6
General and administrative..... 13.3 17.9 15.2 14.0 13.7
----- ----- ----- ----- -----
Total cost and expenses...... 94.9 92.7 89.4 90.2 93.0
----- ----- ----- ----- -----
Operating income................. 5.1 7.3 10.6 9.8 7.0
Other income..................... 3.0 5.1 3.2 2.6 3.5
----- ----- ----- ----- -----
Income before provision for
income taxes.................... 8.1 12.4 13.8 12.4 10.5
Provision for income taxes....... 2.7 4.1 4.5 4.1 3.9
----- ----- ----- ----- -----
Net income....................... 5.4% 8.3% 9.3% 8.3% 6.6%
===== ===== ===== ===== =====
</TABLE>
The Company's revenue increased in each quarter of fiscal 1997 and the first
quarter of fiscal 1998. Revenue growth during these periods was primarily due
to increased licensing of the Company's memory and standard cell products.
Quarter to quarter results fluctuated significantly as a result of the small
number of projects in various stages of completion at any point in time.
Engineering costs, which are allocated between cost of revenue and product
development, generally increased in proportion to the growth in revenue. The
relative contribution, however, of cost of revenue and product development
expenses to total engineering costs has tended to fluctuate from quarter to
quarter in fiscal 1997 and in the first quarter of fiscal 1998. The
25
<PAGE>
Company expects this fluctuation to continue due to a number of factors,
including the number and mix of customer projects and the extent and duration
of new product and technology development initiatives underway in any given
quarter.
Sales and marketing expenses fluctuated in the quarters presented due to
variations in sales and marketing efforts for advertising and promotional
activities, trade shows, increased headcount and costs associated with the
Company's name change. The Company expects sales and marketing expenses to
increase in the future as the Company continues to build the infrastructure
necessary to sell to and support a growing number of customers. The rate of
increase of, and the percentage of revenue represented by, sales and marketing
expenses in the future will vary from period to period based on trade show,
advertising, promotion and other sales and marketing activities undertaken,
the change in sales and marketing headcount in any given period and the rate
of change in the Company's revenue.
General and administrative expenses increased in absolute dollars in each
quarter of fiscal 1997 and in the first quarter of fiscal 1998 as a result of
increased administrative efforts necessary to manage the Company's growth.
However, general and administrative expenses decreased as a percentage of
revenue due to more rapidly increasing revenue in the third and fourth
quarters of fiscal 1997 and in the first quarter of fiscal 1998. The Company
expects general and administrative expenses to grow in absolute dollars in
future periods as the Company expands its operations and as a result of costs
associated with being a public company. The rate of increase of, and the
percentage of revenue represented by, general and administrative expenses in
the future will depend on the rate of change of the Company's revenue.
Other income increased significantly in the second quarter of fiscal 1997
because of interest earned on the proceeds of sales of the Company's Series B
Preferred Stock. Other income declined in the fourth quarter of 1997 from the
previous quarter as the Company used a portion of its cash to fund tenant
improvements for its new facilities. Other income increased in the first
quarter of fiscal 1998 primarily as a result of the generation of cash from
operations and the investment of such cash.
The Company's operating results have fluctuated in the past as a result of a
number of factors including the relatively large size and small number of
customer orders during a given period; the timing of customer orders; delays
in the design process due to changes by a customer to its order after it is
placed; the Company's ability to achieve progress on percentage of completion
contracts; the length of the Company's sales cycle; the Company's ability to
develop, introduce and market new products and product enhancements; the
timing of new product announcements and introductions by the Company and its
competitors; market acceptance of the Company's products; the demand for
semiconductors and end user products that incorporate semiconductors; and
general economic conditions. The Company's future operating results may
fluctuate from quarter to quarter and on an annual basis as a result of these
and other factors, in particular the relatively large size and small number of
customer orders during a given period and the rate of royalties recognized in
a given period. Accordingly, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely decline, perhaps substantially. See "Risk Factors--Fluctuations
in Operating Results" and "Overview."
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from license revenue
received from inception to December 31, 1997 and, to a lesser extent, the sale
of approximately $7.7 million of Preferred Stock and a warrant.
The Company's operating activities were essentially cash neutral in fiscal
1995, provided net cash of $566,000 in fiscal 1996, provided net cash of
$757,000 in fiscal 1997 and provided net cash of $703,000 in the quarter ended
December 31, 1997. Net cash provided by operating activities in fiscal 1996
and fiscal 1997 was due primarily to net income plus depreciation and
amortization.
Net cash used in investing activities was $86,000, $3.0 million, $4.6
million and $742,000 in fiscal 1995, 1996 and 1997 and the quarter ended
December 31, 1997, respectively. Investing activities have consisted primarily
of net purchases of marketable securities and purchases of property and
equipment. See Notes 5 and 6 of Notes to Financial Statements.
Net cash provided by financing activities was $57,000, $3.2 million, $4.2
million and $7,000 in fiscal 1995, 1996 and 1997 and the quarter ended
December 31, 1997, respectively. Financing activities have consisted primarily
of sales of Convertible Preferred Stock partially offset, in 1996, by payments
on the Company's line of credit. See Notes 7 and 9 of Notes to Financial
Statements.
At December 31, 1997, the Company had cash, cash equivalents and current
marketable securities of $3.5 million. As of December 31, 1997, the Company
had retained earnings of $1.2 million and working capital of $4.0 million, net
of a short term component comprised of deferred revenue of $2.0 million. The
Company anticipates spending at least $850,000 for equipment lease and office
lease payments and approximately $3.4 million for capital expenditures over
the next 12 months. See Note 8 of Notes to Financial Statements.
The Company renewed its $300,000 line of credit with Union Bank of
California, N.A. ("Union Bank") in May 1996. Pursuant to its agreement with
Union Bank, the Company is required to satisfy certain financial covenants,
including those relating to working capital, tangible net worth and after tax
profit levels. As of December 31, 1997, the Company had no borrowings under
this credit facility.
The Company intends to continue to invest heavily in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors,
including the costs and timing of expansion of product development efforts and
the success of these development efforts, the costs and timing of expansion of
sales and marketing activities, the extent to which the Company's existing and
new products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims
and other intellectual property rights, the level and timing of license
revenue, available borrowings under line of credit arrangements and other
factors. The Company believes that the proceeds from this Offering, together
with the Company's current cash balances and any cash generated from
operations and from available or future debt financing, will be sufficient to
meet the Company's operating and capital requirements for at least the next 12
months. However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company has no current plans,
and is not currently negotiating, to obtain additional financing following the
completion of this Offering. The Company's forecast period of time through
which its financial resources will be adequate to support its operations is a
forward looking statement that involves risks and uncertainties, and actual
results could vary. The factors described in this paragraph will affect the
Company's future capital requirements and the adequacy of its available funds.
27
<PAGE>
The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may involve restrictive covenants. Strategic arrangements, if necessary to
raise additional funds, may require the Company to relinquish its rights to
certain of its technologies or products. The failure of the Company to raise
capital when needed could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Future
Capital Needs; Uncertainty of Additional Funding" and "Use of Proceeds."
28
<PAGE>
BUSINESS
Artisan is a leading developer of high performance, low power and high
density embedded memory and other IP components for the design and manufacture
of complex ICs. The Company offers highly differentiated memory, standard cell
and I/O components that meet the acute needs of complex System-on-a-Chip ICs
for performance, power and density. Together, memory, standard cell and I/O
components constitute approximately 80% of the silicon area on a typical
System-on-a-Chip IC. The Company's products are optimized for each customer's
manufacturing process and are delivered ready for use with industry standard
and proprietary IC design tools. The Company licenses its products to
semiconductor manufacturers and fabless semiconductor companies for the design
of ICs used in complex, high volume applications, such as portable computing
devices, cellular phones, consumer multimedia products, automotive
electronics, personal computers and workstations.
INDUSTRY BACKGROUND
The development of the merchant IP component market has resulted from the
continuing trend toward horizontal specialization in the semiconductor
industry, a trend that has been driven by a growth in manufacturing capacity
and an increasing focus on core competencies. In the 1970s, semiconductor
companies were vertically integrated and responsible for all aspects of IC
production, including IC design, EDA tool design, IP component design and
IC manufacturing. In the 1980s, application specific integrated circuit
("ASIC") companies developed a new approach that allowed their customers to
perform the logic design of an IC while they performed the detailed physical
implementation of the design and manufactured the IC. In addition, standalone
EDA tool vendors achieved success by providing software design tools to
complement those developed by internal divisions of semiconductor companies.
The early 1990s saw the emergence of a number of fabless semiconductor
companies that chose to focus on specific design expertise, take advantage of
the availability of excess semiconductor manufacturing capacity and avoid the
capital expenditures necessary to build fabrication facilities. Throughout
this period, semiconductor manufacturers continued to focus on their core
competencies: semiconductor design and manufacturing processes. Today, with
the emergence of System-on-a-Chip ICs, semiconductor manufacturers are
beginning to outsource the design of particular IP components critical to the
successful development of System-on-a-Chip ICs. This trend favors the
emergence of a substantial merchant IP component market that is estimated by
industry sources to grow from approximately $760 million in 1997 to
approximately $2.6 billion in the year 2001.
Over the past three decades, advances in semiconductor manufacturing
processes have enabled the transistor density on ICs to double every 18
months. Today, it is possible to place approximately 40 million transistors on
a single IC, a number that is widely expected to increase to nearly 100
million transistors by the end of the decade. State of the art fabrication
facilities of the 1980s produced ICs using process geometries of 1.0^ (one
millionth of a meter). Current state of the art fabrication facilities use
0.25^ process geometries, and many semiconductor manufacturers have begun the
transition to facilities using 0.18^ processes. These advances enable the
manufacture of highly complex System-on-a-Chip ICs, resulting in substantial
performance, power, cost and reliability improvements over conventional multi-
chip systems on printed circuit boards ("PCB Systems"). System-on-a-Chip ICs
combine all of the functionality of PCB Systems onto a single IC and are
optimal for use in complex, high volume applications such as portable
computing devices, cellular phones, consumer multimedia products, automotive
electronics, personal computers and workstations.
29
<PAGE>
[Schematic depiction of a printed circuit board and a System-on-a-Chip]
As shown above, in both a PCB System and a System-on-a-Chip, the primary
building blocks include memory, standard cell (logic), I/O, microprocessor,
digital signal processor ("DSP"), mixed-signal and analog components. However,
integration of these components into System-on-a-Chip ICs at deep submicron
process geometries is far more complex than the design of a traditional PCB
System. With continuing advances in manufacturing processes, an increasing
number of individual transistors must be designed and tested and,
consequently, the gap is increasing between what can be manufactured and what
can be designed within the time to market requirements of the semiconductor
manufacturer. As a result, the full value of today's semiconductor
manufacturing processes is rarely realized, with designers settling for
partial utilization of the process in the interest of meeting cost and
schedule requirements. Given shorter product life cycles and the importance of
reducing time to market, the use of merchant IP components to leverage design
and manufacturing capabilities can be a significant competitive advantage to
semiconductor manufacturers.
Semiconductor manufacturers require solutions that fully utilize their
manufacturing processes in order to maximize performance, speed and density
while reducing time to market. Although the merchant EDA industry has
successfully developed partial solutions to increase design productivity, EDA
tools have not completely overcome the time constraints posed by the need to
create IP components for each IC design in a compressed time to market window.
Merchant suppliers of portable generic IP libraries have also improved design
productivity by offering products designed to work with many manufacturing
processes. However, these generic libraries do not fully utilize the depth and
strengths of a particular manufacturing process. Semiconductor manufacturers
have also tried to expand their design resources, but establishing and
maintaining a large internal design group may divert finite resources from a
semiconductor manufacturer's core competencies. Despite the development and
use of EDA tools and generic libraries and the expansion of internal design
resources, the rapid pace of manufacturing process improvements has continued
to outstrip design capabilities. As a result, the Company believes many
semiconductor manufacturers will utilize merchant IP components in order to
maximize the performance of their product offerings and improve their time to
market.
30
<PAGE>
THE ARTISAN SOLUTION
Artisan is a leading developer of high performance, low power and high
density embedded memory, standard cell and I/O components for the design and
manufacture of complex ICs. The Company provides IP components that are
optimized for each customer's manufacturing process.
The Company's IP components are designed to offer customers the following
benefits:
Performance, Power and Reliability. Artisan delivers high performance, low
power and reliable IP components through a combination of design expertise and
proprietary technology and design tools. The Company's IP components, which are
customized, verified and tested for a particular manufacturing process, require
little or no integration by customers and have been proven by use in 25
different manufacturing processes. Many of the Company's products are designed
to achieve speeds in excess of 300 MHz.
Significant Time to Market Advantages. The Company enables semiconductor
manufacturers to reduce the time required to bring new ICs to market by (i)
eliminating the customer's need to design IP components, (ii) delivering
products designed for a specific manufacturing process and (iii) delivering
products ready for use with industry standard and proprietary IC design tools.
The Company's products can be reused in multiple customer designs, which
reduces design time and decreases time to market for new ICs.
Long Term Product Development Path. Artisan's IP component technology
provides semiconductor manufacturers with reliable building blocks for future
generations of their complex IC designs. Artisan's ability to adapt and
customize IP components used in one process and one design for use in
additional designs and processes provides each customer with a clear
development path for future designs and processes. This enables the Company's
customers to standardize on Artisan products, accelerate their product
development and focus internal engineering resources on core competencies,
including semiconductor design and manufacturing processes.
Cost Effective Solutions. As semiconductor dies shrink and the complexity of
IC designs increases, the cost to design System-on-a-Chip ICs increases
significantly. By providing reliable products with significant time to market
benefits, Artisan enables customers to reduce design costs, minimize
integration costs and increase manufacturing yield. Moreover, by using the
Company's products, semiconductor manufacturers avoid the cost of recruiting
and training a significant group of engineers dedicated to IP component design.
ARTISAN STRATEGY
The Company's objective is to be the leading supplier of high performance IP
components to the semiconductor industry. The Company's strategy is based upon
the following key elements:
Focus on Key Components For High Volume System-on-a-Chip ICs. The Company has
targeted the rapidly growing System-on-a-Chip industry with high performance
memory, standard cell and I/O components. Together, these components constitute
approximately 80% of the silicon area on a typical System-on-a-Chip IC.
Improvements in the performance of these components, particularly memory, can
have a substantial impact on the overall performance of the IC.
Target Leading Semiconductor Manufacturers. The Company focuses on licensing
its products to the world's leading semiconductor manufacturers. These
manufacturers represent the largest revenue potential for the Company because
they utilize the most advanced manufacturing processes, manufacture the largest
number of ICs, have the most pressing need for high performance IP components
and face the greatest time to market pressures. To date,
31
<PAGE>
the Company has licensed its products to many leading semiconductor
manufacturers including Chartered, Fujitsu, GEC Plessey, NEC, OKI, SGS-
THOMSON, Toshiba, TSMC and VLSI Technology.
Generate Revenue Through Innovative Business Model. In late fiscal 1996, the
Company began implementation of a royalty based business model that is
intended to generate revenue from both license fees and future royalties.
Although the Company currently generates revenue solely from license fees, the
Company expects to recognize royalty revenue beginning in fiscal 1999 when the
Company's customers which have entered royalty based licenses are expected to
begin the manufacture and sale of products incorporating the Company's
components. Royalties will be based on per unit sales of ICs and will
generally be based on the silicon area of an IC occupied by the Company's IP
components. In order to maximize royalties, the Company primarily licenses its
products on a nonexclusive, worldwide basis to major semiconductor
manufacturers and grants these manufacturers the right to distribute the
Company's IP components freely to their internal design teams and to fabless
semiconductor companies that manufacture at the same facility. As a result,
the Company believes its license agreements will facilitate the broad and
rapid penetration of the Company's products into multiple designs, and thereby
increase potential royalty revenue.
Proliferate Artisan's IP Components Throughout Customer Designs. The Company
intends to establish itself as the DE FACTO supplier of key IP components
across multiple IC designs and new product generations for each customer. By
making its components easy to integrate into the customer's design
methodologies and supporting both industry standard and proprietary IC design
tools, Artisan facilitates the ready inclusion of its IP components in a large
number of designs. For example, SGS-THOMSON has licensed Artisan's embedded
memory products for use in more than 200 of SGS-THOMSON's IC designs.
Leverage Product Development Process. Artisan has developed a large
portfolio of IP building blocks and design tools that allows the Company to
rapidly develop new products. As its customer relationships mature, the
Company believes that the development time for additional products for a
customer will decrease due to the Company's growing base of knowledge and
understanding of the customer's manufacturing processes. The Company intends
to continue to improve the efficiency of its product development process in
order to decrease product delivery time.
Maintain Technological Leadership. The Company believes that it provides the
fastest memory products and the most dense standard cell product currently
available in the merchant IP component market. The Company intends to maintain
its technological leadership position by continuing to develop a significant
portfolio of IP building blocks upon which it can base new generations of
products and make enhancements to existing products. The Company also intends
to maintain its expertise in state of the art manufacturing processes by
working with customers during their new process development efforts.
PRODUCTS AND APPLICATIONS
Products
Artisan's current family of IP components includes high performance and low
power memory, standard cell and I/O components. Initial license fees typically
range from $400,000 to $800,000 per component, depending on the amount of
customization and the number of design views and models required.
Artisan's products are developed and delivered using a proprietary
methodology that includes a set of design tools, techniques and specific
design expertise that the Company calls
32
<PAGE>
"Process-Perfect." This methodology ensures that the IP components produced by
Artisan are designed to achieve the best combination of performance, power,
density and yield for a given manufacturing process. In addition, the Company
has created a flexible portfolio of IP building blocks. This portfolio,
combined with the Process-Perfect methodology, allows the Company to satisfy
its customers' schedule and quality requirements in a cost effective manner.
Artisan's IP components are easily integrated into a variety of customer
design methodologies and support industry standard IC design tools, including
those from EDA tool vendors such as Cadence, Synopsys and Avant!, as well as
customers' proprietary IC design tools. To support these various IC design
tool environments, each of the Company's products includes a comprehensive set
of verified tool models.
MEMORY PRODUCTS. Artisan's embedded memory products include random access
memories ("RAMs"), read only memories ("ROMs") and register files. The
Company's HS300 and LP133 products include single- and dual-port RAM and ROM
products and dual- and triple-port register files. The Company's embedded
memory products are configurable and vary in size to meet the customer's
specification. For example, the Company's RAM products will support sizes from
2 to 128 bits wide and from 16 to 8,192 words. All of the Company's memory
products include features such as a power down mode, low voltage data
retention and fully static operation. In addition, the Company's memory
products include built-in test interfaces that support popular test
methodologies.
HS300. The HS300 products are designed to achieve speeds in excess of 300
MHz for 0.25(micron) manufacturing processes. The Company achieves the high
performance of its HS300 products through a combination of proprietary
design innovations that include latch based sense amplifiers, high speed
row select technology, precise core cell balancing and rapid recovery
bitlines.
LP133. The LP133 products are designed to operate at low power levels and
to achieve speeds in excess of 133 MHz for 0.25 (micron) manufacturing
processes. The LP133 products achieve low power through a combination of
proprietary design innovations that include latch based sense amplifiers, a
power efficient banked memory architecture, precise core cell balancing and
unique address decoder and driver circuitry.
STANDARD CELL PRODUCT. Artisan's standard cell product includes over 400
cells optimized for each customer's manufacturing process and IC design tool
environment resulting in greater density as compared to competitive standard
cell products. The Company's standard cell product utilizes each customer's
proprietary manufacturing process rules including stacked contact-via,
silicided diffusion and local interconnect layers. All functions are available
in at least four drive strengths, and the Company's inverters, buffers and 3-
state drivers are each available in nine drive strengths.
I/O PRODUCTS. The Company's I/O products comply with industry standard
specifications and conform to the ESD and electrical guidelines of each
customer's manufacturing process, resulting in improved manufacturing yield
and reliability. Examples of the Company's I/O products include oscillator
circuits, slew-rate controlled I/Os and I/Os with selectable output drive
strengths. The Company's I/O products are designed to support ICs
incorporating industry standard PCI, GTL and PECL interfaces or custom
interfaces.
Applications
SGS-THOMSON has licensed memory products from Artisan since 1992 because
such products have met SGS-THOMSON's demanding requirements for performance,
density, power and yield. SGS-THOMSON believes that Artisan's memory products
significantly increase the value of its IC offerings to customers. SGS-THOMSON
has used Artisan's embedded memory
33
<PAGE>
products in more than 200 of its IC designs. SGS-THOMSON has licensed
Artisan's embedded memory products for six different manufacturing processes,
including its 0.5 (micron), 0.35 (micron) and 0.25 (micron) process geometries.
In 1994, NEC began developing a complex IC for the Nintendo 64 video
entertainment system. NEC selected Artisan's memory products because they
would enable NEC to show a clear competitive advantage in the workstation,
graphics/multimedia and networking market segments. Artisan was able to
deliver memory products that were customized for NEC's manufacturing process
on an aggressive delivery schedule which allowed NEC to focus on other design
attributes of the IC for the Nintendo 64. NEC has since licensed Artisan's
memory products for its 0.5 (micron), 0.35 (micron) and 0.25 (micron)
manufacturing processes.
In June 1997, Fujitsu signed an agreement with Artisan to purchase a variety
of Artisan's products, including embedded memory, standard cell and I/O cell
products, for initial implementation into its advanced 3D graphics ICs. By
utilizing the Company's products, Fujitsu can accelerate its product
development and meet the needs of its graphics architecture. The ICs will be
built using Fujitsu's 0.25 (micron) manufacturing process and will use a variety
of Artisan's products, including the HS300 embedded memory, standard cell and
I/O products to support Fujitsu's high performance requirements.
PRODUCT DEVELOPMENT
The Company has targeted the rapidly growing System-on-a-Chip market with
high performance and low power memory, standard cell and I/O products. The
ability of the Company to compete in the future will be substantially
dependent on its ability to continually create competitive technologies to
meet changing market needs. To this end, the Company's engineers are involved
in the development of more advanced versions of the Company's products as well
as the development of new products. The Company has assembled a team of highly
skilled engineers whose activities are focused on the development of IP
components for current and anticipated manufacturing processes. Because of the
complexity of these activities, the design and development process at Artisan
is a multidisciplinary effort requiring expertise in electronic circuit
design, process technology, physical layout, design software, model
generation, data analysis and processing and general IC design.
As of December 31, 1997, Artisan had 47 employees in the engineering
department. In fiscal 1995, 1996 and 1997 and the first quarter of fiscal
1998, total engineering costs were approximately $2.0 million, $2.4 million,
$4.8 million and $1.9 million, respectively. Engineering costs are allocated
between cost of revenue and product development expense. Engineering efforts
devoted to developing products for specific customer projects are recognized
as cost of revenue while the balance of engineering costs, incurred for
general development of Artisan's technology, is charged to product
development. The Company expects that it will continue to invest substantial
funds for engineering activities. There can be no assurance that the Company
can develop and introduce new technology in a timely fashion or that such new
technology will be accepted by the market. See "Risk Factors--New Product
Development and Technological Change."
The Company's customers compete in the semiconductor industry, which is
subject to rapid technological change, frequent introductions of new products,
short product life cycles, changes in customer demands and requirements and
evolving industry standards. Accordingly, the Company's future success will
depend on its ability to continue to enhance its existing products and to
develop and introduce new products that satisfy increasingly sophisticated
customer requirements and that keep pace with new product introductions,
emerging manufacturing processes and other technological developments in the
semiconductor industry. The
34
<PAGE>
development of new manufacturing processes, introduction of products embodying
new technologies and the emergence of new industry standards can render
existing products obsolete and unmarketable. Any failure by the Company to
anticipate or respond adequately to changes in manufacturing processes or
customer requirements, or any significant delays in product development or
introduction, would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will not experience difficulties which could delay or prevent the
successful development, introduction and sale of new or enhanced products or
that such new or enhanced products will achieve market acceptance. Any delay
in release dates of new or enhanced products could materially adversely affect
the Company's business, operating results and financial condition. The Company
could also be exposed to litigation or claims from its customers in the event
that it does not satisfy its delivery commitments. There can be no assurance
that any such claim would not have a material adverse effect on the Company's
business, operating results and financial condition.
CUSTOMERS
The Company is focused on licensing its products to manufacturers in the
semiconductor market. Many of the world's leading semiconductor manufacturers
are among the Company's customers, and since inception the Company has sold
its products to 21 semiconductor manufacturers and fabless semiconductor
companies. The following chart identifies all customers that initiated new
licenses of IP components from the Company since the beginning of fiscal 1995.
SELECTED CUSTOMERS FOR ARTISAN'S PRODUCTS
<TABLE>
<CAPTION>
MANUFACTURING PROCESSES
ORIGINAL ---------------------------------------------------------------------------
CUSTOMER LICENSE DATE PRODUCT(S)* 1.0(micron) 0.8(micron)0.6(micron)0.5(micron) 0.35(micron) 0.25(micron)
- -------- ------------ ----------- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Analog Devices.......... 3/94 SC X
ATI**................... 8/95 SC, I/O X X X X
Chartered............... 2/97 M X
DOD..................... 4/93 SC X X X
Fujitsu................. 5/96 M, SC, I/O X X+
GEC Plessey............. 7/94 SC X X
ITT Electronics......... 1/97 SC X
LSI Logic............... 1/95 M X X X
NEC..................... 6/94 M X X X
Newport Wafer Fab....... 12/97 M, SC, I/O X+ X+
OKI..................... 6/96 M, SC X X X
Quickturn Design
Systems................ 8/91 M X X
SGS-THOMSON............. 3/92 M X X X
Toshiba................. 8/96 M X
TSMC.................... 12/97 M, SC X+
VLSI Technology......... 11/97 M X+
</TABLE>
- --------
* For purposes of this table, "M" refers to memory products, "SC" refers to
standard cell products and "I/O" refers to I/O cell products.
** The 0.6(mu) process was licensed in November 1993 by Tseng Labs, the
graphics business of which was acquired by ATI in 1997.
+ The Company is currently in the process of completing delivery of an initial
product for this manufacturing process.
The Company has been dependent on a relatively small number of customers for
a substantial portion of its annual revenue, although the customers comprising
this group have
35
<PAGE>
changed from time to time. In fiscal 1995, SGS-THOMSON, NEC, the DOD, Samsung
and LSI Logic accounted for 20%, 17%, 17%, 11% and 10% of revenue,
respectively. In fiscal 1996, ATI, SGS-THOMSON, OKI and the DOD accounted for
37%, 20%, 15% and 10% of revenue, respectively. In fiscal 1997, SGS-THOMSON,
Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of revenue,
respectively. In the quarter ended December 31, 1997, OKI, Fujitsu, ATI, SGS-
THOMSON and NEC accounted for 21%, 18%, 17%, 16% and 14% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although
the companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the
Company's products. None of the Company's customers has a written agreement
with the Company that obligates it to license additional products, and there
can be no assurance that any customer will license IP components from the
Company in the future. The loss of one or more of the Company's major
customers, or reduced orders by one or more of such customers, could
materially adversely affect the Company's business, operating results and
financial condition. See "Risk Factors--Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
There can be no assurance that the Company will be successful in continuing
to license its products to current customers or in entering into licenses with
additional semiconductor manufacturers. The Company faces numerous risks in
successfully obtaining orders from customers on terms consistent with the
Company's business model including, among others, the lengthy and expensive
process of building a relationship with a potential customer before reaching
an agreement with such party to license the Company's products; persuading
large semiconductor manufacturers to work with, disclose proprietary
information to and rely upon, a smaller company, such as the Company; and
persuading potential customers to bear certain development costs associated
with development of customized components. In addition, there are a relatively
limited number of semiconductor manufacturers to which the Company can license
its technology in a manner consistent with its business model. The Company
also faces significant competition from internal design groups of
semiconductor manufacturers. See "--Competition" and "Risk Factors--
Competition."
SALES, MARKETING AND DISTRIBUTION
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components freely to their internal design teams
and to fabless semiconductor companies that manufacture at the same facility.
The Company's sales, marketing and distribution approach gives it an advantage
over its competitors since the Company is able to leverage its customers'
sales and marketing organizations and avoid the costs associated with hiring,
training and compensating the large sales force necessary to sell directly to
each end user customer. As of December 31, 1997, the Company's sales and
marketing organization was comprised of 11 sales and four marketing employees.
In parts of Asia, the Company relies in part on a consulting company to assist
its sales efforts.
A substantial portion of the Company's revenue is derived from customers
outside the United States. In fiscal 1995, 1996 and 1997 and the first quarter
of fiscal 1998, revenue derived from customers outside the United States,
primarily in Asia and Europe, represented approximately 55%, 47%, 67% and 60%,
respectively, of the Company's revenue. The Company anticipates that
international revenue will remain a substantial portion of its revenue in the
future. To date, all of the revenue from international customers has been
denominated in U.S. dollars. In the event that the Company's competitors
denominate their sales in currencies that
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<PAGE>
become relatively inexpensive in comparison to the U.S. dollar, the Company
may experience fewer orders from international customers whose business is
based primarily on the less expensive currencies. To date, the Company has not
experienced any negative impact as a result of the financial and stock market
dislocations that occurred in the Asian financial markets during 1997;
however, there can be no assurance that present or future dislocations will
not have a material adverse effect on the Company's business, operating
results and financial condition. The Company intends to continue to expand its
sales and marketing activities in Asia and Europe. The Company's expansion of
its international business involves a number of risks including the impact of
possible recessionary environments in economies outside the United States;
political and economic instability; exchange rate fluctuations; longer
receivables collection periods and greater difficulty in accounts receivable
collection from customers; unexpected changes in regulatory requirements;
reduced or limited protection for intellectual property rights; export license
requirements; tariffs and other trade barriers; and potentially adverse tax
consequences. There can be no assurance that the Company will be able to
sustain or increase revenue derived from international customers or that the
foregoing factors will not have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Risks
Associated with International Sales."
COMPETITION
The Company's strategy of targeting semiconductor manufacturers that
participate in, or may enter, the System-on-a-Chip market requires the Company
to compete in intensely competitive markets. Within the merchant segment of
the IP market, the Company competes primarily against Aspec, Avant!, Cascade
Design, Mentor Graphics and Synopsys. In addition, the Company may face
competition from consulting firms and companies that typically have operated
in the generic library segment of the IP market and that now seek to offer
customized IP components as an enhancement to their generic solutions. The
Company also faces significant competition from internal design groups of the
semiconductor manufacturers that are expanding their portfolio of IP
components to participate in the System-on-a-Chip market. These internal
design groups compete with the Company for access to the parent's IP component
requisitions and may eventually compete with the Company to supply IP
components to third parties on a merchant basis. There can be no assurance
that internal design groups will not expand their product offerings to compete
directly with those of the Company or will not actively seek to participate as
merchant vendors in the IP component market by selling to third party
semiconductor manufacturers or, if they do, that the Company will be able to
compete against them successfully. In addition to competition from companies
in the merchant IP component market, the Company faces competition from
vendors that supply EDA software tools, including certain of those mentioned
above, and there can be no assurance that the Company will be able to compete
successfully against them.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's IP components or that may provide better performance or
additional features not currently provided by the Company. The Company
believes that the principal competitive factors for IP components are speed,
power usage, density, reliability and price. The Company believes that, on
balance, it competes favorably with respect to the above factors.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company.
As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. In addition, certain of the
Company's principal competitors offer a single vendor solution, since, in the
case of EDA
37
<PAGE>
companies, they maintain their own EDA design tools and IP component
libraries, or, in the case of internal design groups, they provide IP
components developed to utilize the qualities of a given manufacturing
process, and may therefore benefit from certain capacity, cost and technical
advantages. The Company's ability to compete successfully in the emerging
market for IP components will depend upon certain factors, many of which are
beyond the Company's control including, but not limited to, success in
designing new products; implementing new designs at smaller process
geometries; access to adequate EDA tools (many of which are licensed from the
Company's current or potential competitors); the price, quality and timing of
new product introductions by the Company and its competitors; the emergence of
new IP component interchangeability standards; the widespread licensing of IP
components by semiconductor manufacturers or their design groups to third
party manufacturers; the ability of the Company to protect its intellectual
property; market acceptance of the Company's IP components; success of
competitive products; market acceptance of products using System-on-a-Chip
ICs; and industry and general economic conditions. There can be no assurance
that the Company will be able to compete successfully in the emerging merchant
IP component market. See "Risk Factors--Competition."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company relies primarily on a combination of nondisclosure agreements
and other contractual provisions and patent, trademark, trade secret, and
copyright law to protect its proprietary rights. The Company has an active
program to protect its proprietary technology through the filing of patents.
As of December 31, 1997, the Company had applications for 13 patents on file
with the USPTO. To date, the USPTO has issued a notice of allowance with
respect to a patent relating to reducing power consumption of the Company's
memory products and a second patent relating to increasing the speed of the
Company's memory products. The Company expects that the USPTO will issue
patents relating to the notices of allowance within the next six months. There
can be no assurance, however, that such patents will actually be issued. As of
December 31, 1997, the Company had no filings for foreign patents, but the
Company intends to file such foreign patent applications as appropriate in the
future. There can be no assurance that the Company's pending patent
applications will be approved, that any issued patents will protect the
Company's intellectual property or will not be challenged by third parties, or
that the patents of others will not have an adverse effect on the Company's
ability to do business. Furthermore, there can be no assurance that others
will not independently develop similar or competing technology or design
around any patents that may be issued to the Company.
The Company also relies on trademark and trade secret laws to protect its
intellectual property. The Company protects its trade secrets and other
proprietary information through confidentiality agreements with its employees
and customers and other security measures. Despite these efforts, there can be
no assurance that others will not gain access to the Company's trade secrets,
that such trade secrets will not be independently discovered by competitors or
that the Company can meaningfully protect its intellectual property. In
addition, effective trade secret protection may be unavailable or limited in
certain foreign countries. Although the Company intends to protect its rights
vigorously, there can be no assurance that such measures will be successful.
Failure of the Company to enforce its patents, trademarks or copyrights or
to protect its trade secrets could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that such intellectual property rights can be successfully asserted
in the future or will not be invalidated, circumvented or challenged. From
time to time, third parties, including competitors of the Company, may assert
patent, copyright and other intellectual property rights to technologies that
are important to the Company. There
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<PAGE>
can be no assurance that third parties will not assert infringement claims
against the Company in the future, that assertions by third parties will not
result in costly litigation or that the Company would prevail in any such
litigation or be able to license any valid and infringed patents from third
parties on commercially reasonable terms. Litigation, regardless of the
outcome, could result in substantial cost and would divert resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business, operating results
and financial condition.
In addition, there can be no assurance that competitors of the Company, many
of which have substantial resources and have made substantial investments in
competing technologies, do not have, or will not seek to apply for and obtain,
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the USPTO to determine the priority of inventions. The
defense and prosecution of intellectual property suits, USPTO interference
proceedings and related legal and administrative proceedings are both costly
and time consuming. Any such suit or proceeding involving the Company could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Risk Factors--Risks Associated with Protection
of Intellectual Property."
EMPLOYEES
As of December 31, 1997, the Company had 72 fulltime employees. Of this
total, 47 were in engineering, 15 were in sales and marketing and 10 were in
finance and administration. None of the Company's employees is represented by
a labor union or is subject to a collective bargaining agreement. The Company
has never experienced a work stoppage and believes that its relations with
employees are good.
The Company's success depends in large part on the continued contributions
of its key management, engineering, sales and marketing personnel, many of
whom are highly skilled and would be difficult to replace. None of the
Company's senior management or key technical personnel is bound by an
employment contract. In addition, the Company does not currently maintain key
man life insurance covering its key personnel. The Company believes that its
success depends to a significant extent on the ability of its management to
operate effectively, both individually and as a group. The Company must also
attract and retain highly skilled managerial, engineering, sales and marketing
and finance personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of any of the key
personnel, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers, could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Management--Executive Officers and Directors."
FACILITIES
The Company's executive, administrative and technical offices currently
occupy 32,660 square feet in Sunnyvale, California, under a lease that expires
in 2004. The Company sublets to a third party the 16,797 square foot space it
formerly occupied in San Jose, California. The lease on the San Jose space
expires in 2001. The Company believes that its existing facilities are
adequate to meet its current needs but that it may need to seek additional
space in the future. The Company believes that suitable additional space will
be available on commercially reasonable terms as needed.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their positions and
their ages (as of December 31, 1997) are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark R. Templeton........... 39 President, Chief Executive Officer and Director
Scott T. Becker............. 37 Chief Technical Officer and Director
Robert D. Selvi............. 41 Vice President, Finance and Chief Financial
Officer
Larry J. Fagg............... 51 Vice President, Worldwide Sales
Dhrumil Gandhi.............. 40 Vice President, Engineering
Jeffrey A. Lewis............ 37 Vice President, Marketing
Daniel I. Rubin............. 37 Vice President, Business Development
Lucio L. Lanza(1)(2)........ 53 Chairman of the Board of Directors
Dr. Eli Harari(1)(2)........ 52 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
MARK R. TEMPLETON has served as President, Chief Executive Officer and a
director of the Company since April 1991 when he co-founded the Company. From
April 1990 to March 1991, Mr. Templeton was director of the Custom IC Design
Group at Mentor Graphics, an EDA company. From October 1984 to March 1990, he
held a variety of positions with Silicon Compilers Systems Corporation
("Silicon Compilers"), an EDA company, with the last position being Director
of Custom IC Design Group. Mr. Templeton received a B.S.E.E. from Boston
University.
SCOTT T. BECKER has served as Chief Technical Officer and a director of the
Company since April 1991 when he co-founded the Company. From April 1990 to
April 1991, he was the manager of the library development group at the IC
Division of Mentor Graphics. From May 1985 to April 1990, he was responsible
for library development at Silicon Compilers. Mr. Becker received a B.S.E.E.
from the University of Illinois and a M.S.E.E. from Santa Clara University.
ROBERT D. SELVI has served as Vice President, Finance and Chief Financial
Officer of the Company since June 1997. From May 1995 until May 1997, Mr.
Selvi served as Vice President and Chief Financial Officer of Cooper & Chyan
Technology, Inc., an EDA company. From February 1992 to April 1995, he served
as Senior Vice President, Operations and Finance and Chief Financial Officer
of Claris Corp., a software subsidiary of Apple Computer, Inc. ("Apple"), a
computer hardware and software company. From October 1982 to January 1992, Mr.
Selvi served in a variety of managerial capacities at Apple, including, among
others, Senior Manager of Corporate Development, Assistant Treasurer and
Manager of Financial Services. Mr. Selvi received a B.S. in Finance and a
M.B.A. from Santa Clara University.
LARRY J. FAGG has served as Vice President of Worldwide Sales of the Company
since August 1997. From May 1995 to August 1997, he served as Director, North
American Sales at Silicon Architects group of Synopsys, an EDA company. From
May 1994 to May 1995, he served as Vice President of North American Sales at
CrossCheck Technology, Inc., an EDA company. From December 1988 to May 1994,
he served as Vice President, Strategic Alliances of Cadence, an EDA company.
DHRUMIL GANDHI has served as Vice President of Engineering of the Company
since May 1993. From July 1983 to May 1993, he served as Senior Manager for
Advanced ASIC Design
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<PAGE>
Systems at Mentor Graphics. He received a B.S.E.E. from the Indian Institute
of Technology and a M.S.E.E. from the California Institute of Technology.
JEFFREY A. LEWIS has served as Vice President of Marketing of the Company
since September 1996. From August 1994 to September 1996, he served in several
managerial capacities at Compass Design Automation, Inc. ("Compass"), an EDA
company, the most recent of which was Vice President of Corporate Marketing.
Prior to joining Compass, from April 1992 to August 1994, Mr. Lewis was
Director of Marketing at Redwood Design Automation, Inc., an EDA company. Mr.
Lewis received a B.S.E.E., a B.A. in Economics and a M.B.A., all from the
University of California, Berkeley.
DANIEL I. RUBIN has served in several capacities at the Company since 1991
when he co-founded the Company and most recently has served as its Vice
President of Business Development. From June 1988 to June 1990, he served as
managing director of the Hong Kong subsidiary of Ultratech Stepper, Inc., a
semiconductor capital equipment manufacturer, and was responsible for all
sales, marketing and service. Mr. Rubin received a B.A. in Physics from Pomona
College.
LUCIO L. LANZA has served as a director of the Company since March 1996 and
was named Chairman of the Board of Directors in November 1997. Mr. Lanza
joined U.S. Venture Partners as a partner in 1990 and became a general partner
in 1996. From 1990 to 1995, Mr. Lanza also served as an independent consultant
to companies in the semiconductor, communications and computer-aided design
companies. From 1986 to 1989, he served as Chief Executive Officer of EDA
Systems, Inc., a design automation software company. Mr. Lanza also serves on
the boards of directors of Raster Graphics, Inc. and several private companies
including CAD.LAB, Inc., PDF Solutions, Inc., and Veridicom, Inc. Mr. Lanza
received a doctorate degree in Electronic Engineering from Politecnico of
Milano.
DR. ELI HARARI has served as a director of the Company since November 1997.
Dr. Harari is the founder of Sandisk Corporation ("Sandisk"), a flash memory
data storage product company, and has served as the President, Chief Executive
Officer and a director of Sandisk since June 1988. Dr. Harari founded Wafer
Scale Integration, a privately held semiconductor company, in 1983 and was its
President and Chief Executive Officer from 1983 to 1986, and Chairman and
Chief Technical Officer from 1986 to 1988. From 1973 to 1983, Dr. Harari held
various management positions with Honeywell Inc., Intel Corporation and Hughes
Aircraft Microelectronics. Dr. Harari received a Ph.D. in Solid State Sciences
from Princeton University.
All directors are elected at the Annual Meeting of Stockholders and hold
office until the election and qualification of their successors at the next
Annual Meeting of Stockholders. Officers serve at the discretion of the Board
of Directors and, therefore, the term of office for each officer is
indefinite. There are no family relationships among any of the Company's
directors or executive officers.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is currently comprised of directors Lanza and
Harari. The Audit Committee's functions are expected to include the following
upon the closing of this Offering: (i) recommending annually to the Board of
Directors the appointment of the independent public accountants of the
Company, (ii) reviewing the scope of the prospective annual audit and
reviewing the results thereof with the independent public accountants, (iii)
reviewing non-audit services of the independent public accountants, (iv)
reviewing compliance with the accounting and financial policies of the
Company, (v) reviewing the adequacy of the
41
<PAGE>
financial organization of the Company, (vi) reviewing the adequacy of the
Company's internal accounting control system and its compliance with federal
and state laws relating to accounting practices and (vii) reviewing
transactions with affiliated parties. The Compensation Committee is currently
comprised of directors Lanza and Harari. Upon the closing of this Offering,
the functions of the Compensation Committee are expected to include the review
and recommendation to the Board of Directors of the compensation and benefits
of all officers, directors and consultants of the Company and the review of
general policies relating to compensation and benefits of the Company's
employees. In addition, the charter of the Compensation Committee provides
that upon the request of the Board of Directors, the Compensation Committee
may administer the Company's 1993 Plan and recommend and approve the grant of
options thereunder. The 1993 Plan is currently administered by the
Compensation Committee.
DIRECTOR COMPENSATION
Board of Directors members do not receive any cash fees for their service on
the Board of Directors or any committee of the Board of Directors, but they
are entitled to reimbursement of all reasonable out of pocket expenses
incurred in connection with their attendance at Board of Directors and Board
of Directors committee meetings. All Board of Directors members are eligible
to receive stock options pursuant to the discretionary option grant program in
effect under the 1993 Plan and, upon the closing of this Offering, nonemployee
directors will receive stock options pursuant to the automatic option grant
program in effect under the Director Plan. See "--Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. Mr. Templeton intends to participate in the discussions of the
Compensation Committee regarding all officers' compensation other than his
own.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability (i)
for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of the
Company pursuant to the provisions described herein, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
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The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers negligence and may cover gross
negligence on the part of indemnified parties. The Company's Bylaws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Bylaws would permit indemnification.
Prior to the effective date of this Offering, the Company will enter into
agreements to indemnify its directors and officers, in addition to
indemnification provided for in the Company's Bylaws. These agreements, among
other things, will indemnify the Company's directors and officers for certain
expenses (including attorneys' fees and other costs), judgments, fines,
penalties and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of the Company, arising
out of such person's services as a director or officer of the Company, any
subsidiary of the Company or any other Company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding that may result in a claim for such
indemnification.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding the
compensation of the Company's Chief Executive Officer and the Company's next
four most highly compensated executive officers (collectively, the "Named
Executive Officers") for the fiscal year ended September 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND POSITION SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- ----------------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Mark R. Templeton........... $ 172,800 $ 2,500 -- $4,474
President and Chief
Executive Officer
Scott T. Becker............. 172,800 2,500 -- 1,728
Chief Technical Officer
Dhrumil Gandhi.............. 172,800 2,500 -- 2,376
Vice President, Engineering
Daniel I. Rubin............. 172,800 2,500 -- 2,375
Vice President, Business
Development
Jeffrey A. Lewis............ 140,000 22,500 253,705 2,375
Vice President, Marketing
</TABLE>
- --------
(1) Represents the fair market value on the date of grant of a stock bonus of
500 shares of Common Stock granted to each Named Executive Officer in
September 1997, plus, in the case of Mr. Lewis, a cash bonus of $20,000.
See "Certain Transactions--Transactions with Directors and Executive
Officers."
(2) These shares are subject to stock options granted under the 1993 Plan. On
January 12, 1998, the Company granted options to purchase Common Stock at
an exercise price of $7.70 per share, with the exception of Messrs. Gandhi
and Lewis for whom the exercise price is $7.00 per share, to the following
Named Executive Officers in the following amounts: 100,000 shares to Mark
R. Templeton, 50,000 shares to each of Scott T. Becker and Dhrumil Gandhi,
35,000 shares to Jeffrey A. Lewis and 20,000 shares to Daniel I. Rubin.
(3) Represents matching contributions under the Company's 401(k) plan. See "--
401(k) Plan."
44
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information regarding options to
purchase the Company's Common Stock granted to each Named Executive Officer in
fiscal 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE STOCK PRICE
SECURITIES OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(1)
OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------
NAME GRANTED(2) EMPLOYEES SHARE(3) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark R. Templeton....... -- -- -- -- -- --
Scott T. Becker......... -- -- -- -- -- --
Dhrumil Gandhi.......... -- -- -- -- -- --
Daniel I. Rubin......... -- -- -- -- -- --
Jeffrey A. Lewis........ 253,705 33.9% $0.15 10/6/2006 $ 23,933 $ 60,651
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. Actual gains, if
any, on stock option exercises are dependent on the future financial
performance of the Company, overall conditions and the option holder's
continued employment through the vesting period and option term. This
table does not take into account any appreciation in the fair market value
of the Common Stock from the date of grant to the date of this offering,
other than the columns reflecting assumed rates of appreciation of 5% and
10%.
(2) The option granted during fiscal 1997 to Mr. Lewis was granted under the
1993 Plan. Subject to Mr. Lewis' continued employment with the Company,
the option becomes exercisable as to 25% of the option shares on the first
anniversary of the date of grant and as to 6.25% per quarter thereafter,
with full vesting occurring on the fourth anniversary of the date of
grant. On January 12, 1998, the Company granted options to purchase Common
Stock at an exercise price of $7.70 per share, with the exception of
Messrs. Gandhi and Lewis for whom the exercise price is $7.00 per share,
to the following Named Executive Officers in the following amounts:
100,000 shares to Mark R. Templeton, 50,000 shares to each of Scott T.
Becker and Dhrumil Gandhi, 35,000 shares to Jeffrey A. Lewis and 20,000
shares to Daniel I. Rubin. See "--Stock Plans."
(3) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock on the date of grant, as determined by the
Board of Directors. The Company's Common Stock was not traded publicly at
the time of the foregoing grant to Mr. Lewis.
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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OPTION VALUES AS OF SEPTEMBER 30, 1997
The following table sets forth certain information with respect to the
number and value of the stock options held by each Named Executive Officer as
of September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE SEPTEMBER 30, 1997 SEPTEMBER 30, 1997(2)
ON REALIZED ------------------------- -------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark R. Templeton....... -- -- -- -- -- --
Scott T. Becker......... -- -- -- -- -- --
Dhrumil Gandhi(3)....... 219,088 $39,184 110,957 76,837 $540,766 $372,659
Daniel I. Rubin......... -- -- -- -- -- --
Jeffrey A. Lewis........ -- -- 63,426 190,279 $307,616 $922,853
</TABLE>
- --------
(1) "Value realized" is calculated on the basis of the fair market value of
the Common Stock on the date of exercise minus the exercise price, does
not necessarily indicate that the optionee sold such stock and does not
take into account that some of such shares are subject to rights of
repurchase on the part of the Company that lapse at various times over
four years after the date of grant.
(2) Based upon the fair market value of $5.00 per share as of fiscal year end
minus the exercise price.
(3) Consists of three options with exercise prices of $0.01, $0.15 and $0.15,
respectively.
STOCK PLANS
1993 Stock Option Plan. The 1993 Plan was adopted by the Board of Directors
and approved by the Company's stockholders in October 1993. A total of
4,291,396 shares of Common Stock has been reserved for issuance under the 1993
Plan. The 1993 Plan provides for grants of incentive stock options to
employees (including officers and employee directors) and nonstatutory stock
options to consultants (including nonemployee directors) of the Company. The
purpose of the 1993 Plan is to attract and retain the best available personnel
for positions of substantial responsibility and to provide additional
incentive to employees and consultants to promote the success of the Company's
business. The 1993 Plan is presently being administered by the Board of
Directors, which determines the optionees and the terms of options granted,
including the exercise price, number of shares subject to the option and the
exercisability thereof. The 1993 Plan is currently being administered by the
Compensation Committee of the Board of Directors.
The term of an option granted under the 1993 Plan is stated in the option
agreement. However, the term of an incentive stock option may not exceed 10
years and, in the case of an incentive or nonstatutory stock option granted to
an optionee who, at the time of grant, owns stock representing more than 10%
of the Company's outstanding capital stock, the term of such option may not
exceed five years. Options granted under the 1993 Plan vest and become
exercisable as set forth in each option agreement. In general, no option may
be transferred by the optionee other than by will or the laws of descent or
distribution, and each option may be exercised, during the lifetime of the
optionee, only by such optionee. An optionee whose relationship with the
Company or any related corporation ceases for any reason (other than by death
or total and permanent disability) may exercise options in the three month
period following such cessation, unless such options terminate or expire
sooner (or for nonstatutory stock options later), by their terms, but only to
the extent the option had vested on such date of cessation. In the event of
death or total and permanent disability, the option may be exercised in the
six month period following the date of death or total and permanent disability
unless such options terminate or expire sooner (or for nonstatutory stock
options, later), but only to the extent the option had vested as of six months
after the date of death or disability. In the event
46
<PAGE>
of a merger of the Company with or into another corporation, all outstanding
options may be assumed or an equivalent option may be substituted by the
surviving entity. If such options are not assumed or substituted, such options
will become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution,
the Board of Directors will notify optionees that all options will be fully
exercisable for a period of 15 days, after which such options will terminate.
The Board of Directors determines the exercise price of options granted under
the 1993 Plan at the time of grant, provided that the exercise price of all
incentive stock options must be at least equal to the fair market value of the
shares on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting rights of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date. The
consideration for exercising any incentive stock option or any nonstatutory
stock option may consist of cash, check, promissory note, delivery of already-
owned shares of the Company's Common Stock subject to certain conditions,
delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds required to pay the exercise price, a reduction in the amount
of any Company liability to an optionee, or any combination of the foregoing
methods of payment or such other consideration or method of payment to the
extent permitted under applicable law. No incentive stock options may be
granted to a participant that when aggregated with all other incentive stock
options granted to such participant, would have an aggregate fair market value
in excess of $100,000 becoming exercisable in any calendar year. No employee
may be granted, in any fiscal year of the Company, options to purchase more
than 250,000 shares (or 1,000,000 shares in the case of an employee's initial
year of employment). The 1993 Plan will terminate in October 2003, unless
sooner terminated by the Board of Directors.
As of January 12, 1998, 847,288 shares of Common Stock had been issued upon
the exercise of options granted under the 1993 Plan, options to purchase
2,103,549 shares of Common Stock at a weighted average exercise price of $3.89
per share were outstanding and 1,340,559 shares remain available for future
option grants under the 1993 Plan.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Purchase Plan was adopted by the
Board of Directors and approved by the Company's stockholders in November
1997. A total of 600,000 shares of Common Stock has been reserved for issuance
under the Purchase Plan, together with an annual increase to the number of
shares reserved thereunder on each anniversary date of the adoption of the
Purchase Plan equal to the lesser of (i) 200,000 shares, (ii) one percent of
the outstanding shares of the Company on such date or (iii) a lesser amount
determined by the Board of Directors. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, will be administered by the Board of
Directors and may be administered by a committee appointed by the Board of
Directors. Employees (including officers and employee directors of the
Company, but excluding 5% stockholders) are eligible to participate if they
are customarily employed for at least 20 hours per week and for more than five
months in any calendar year. The Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions, which may not exceed 15% of
an employee's compensation. The Purchase Plan will be implemented in a series
of overlapping offering periods, each to be approximately 24 months in
duration. The initial offering period under the Purchase Plan will begin on
the effective date of this Offering and subsequent offering periods will begin
on the first trading day on or after February 1 and August 1 of each year.
Each participant will be granted an option on the first day of the offering
period and such option will be automatically exercised on the last day of each
semi-annual period throughout the offering period. If the fair market value of
the Common Stock on any purchase date is lower than such fair market value on
the start date of
47
<PAGE>
that offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately following offering period. The purchase price of the Common Stock
under the Purchase Plan will be equal to 85% of the lesser of the fair market
value per share of Common Stock on the start date of the offering period or on
the date on which the option is exercised. Employees may end their
participation in an offering period at any time during that period, and
participation ends automatically on termination of employment with the
Company. In the event of a proposed dissolution or liquidation of the Company,
the offering periods terminate immediately prior to the consummation of the
proposed action, unless otherwise provided by the Board of Directors. In the
event of a proposed sale of all or substantially all of the Company's assets
or the merger of the Company with or into another corporation, each
outstanding option will be assumed or an equivalent option substituted by the
successor, parent or subsidiary. If the successor corporation refuses to
assume or substitute the option, then the offering period in progress will be
shortened by setting a new exercise date that is the day before the sale or
merger and the offering period in progress will end on the new exercise date.
In the event of a dissolution, liquidation, merger or asset sale, each
participant will be notified at least ten business days prior to the new
exercise date, and unless such participant ends his or her participation, the
option will be exercised automatically on the new exercise date. The Purchase
Plan will terminate in November 2007, unless sooner terminated by the Board of
Directors.
1997 DIRECTOR OPTION PLAN. The Director Plan, which becomes effective upon
the effective date of this Offering, was adopted by the Board of Directors and
approved by the Company's stockholders in November 1997. A total of 200,000
shares of Common Stock has been reserved for issuance under the Director Plan.
The option grants under the Director Plan are automatic and nondiscretionary,
and the exercise price of the options will be equal to 100% of the fair market
value of the Common Stock on the grant date. The Director Plan provides for
the grant of an initial option to purchase 25,000 shares to each nonemployee
director of the Company upon the effective date of this Offering at a per
share exercise price equal to the initial public offering price. In addition,
each new nonemployee director joining the Board of Directors after this
Offering will automatically be granted an option to purchase 25,000 shares of
Common Stock upon joining the Board of Directors. Subsequently, each
nonemployee director will automatically be granted an additional option to
purchase 5,000 shares of Common Stock at the next meeting of the Board of
Directors following the annual meeting of stockholders in each year beginning
with the 1998 Annual Meeting of Stockholders, if on such date such director
has served on the Board of Directors for the preceding six months. The term of
such options is ten years, provided that such options will terminate three
months following the termination of the optionee's status as a director (or 12
months if the termination is due to death or disability). The initial 25,000
share grants vest at a rate of 25% on the first anniversary of the date of
grant and at a rate of 1/48th of the shares subject to the option per month
thereafter. The subsequent 5,000 share grants vest at a rate of 1/48th of the
shares subject to the option per month following the date of grant. In the
event of a merger of the Company with or into another corporation, all
outstanding options may be assumed or an equivalent option may be substituted
by the surviving entity. If such options are not assumed or substituted, such
options will become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
In the event that options become exercisable in lieu of assumption or
substitution, the Board of Directors will notify optionees that all options
will be fully exercisable for a period of 30 days, after which such options
will terminate. The Director Plan will terminate upon the tenth anniversary of
the effective date of the initial public offering, unless sooner terminated by
the Board of Directors.
48
<PAGE>
401(K) PLAN
As of June 1, 1991, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to reduce their current
compensation by up to the lesser of 15% of their annual compensation or the
statutorily prescribed annual limit ($9,500 in calendar years 1996 and 1997)
and have the amount of such reduction contributed to the 401(k) Plan. The
Company currently matches contributions by employees up to 25% of the
individual employee's contributions. The trustees under the 401(k) Plan, at
the direction of each participant, invest the assets of the 401(k) Plan in
designated investment options. The 401(k) Plan is intended to qualify under
Section 401 of the Code, so that contributions to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable until withdrawn, and
so that the contributions by the Company will be deductible when made.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Pursuant to the terms of a September 5, 1996 amendment to his offer letter,
Jeffrey A. Lewis, Vice President, Marketing of the Company, is also entitled,
under specified conditions, to partial acceleration of vesting of an option to
purchase 253,705 shares of the Company's Common Stock. In the event Mr. Lewis'
employment is terminated other than for cause following the sale or merger of
the Company with another entity, 25% of Mr. Lewis' original option grant will
vest and become immediately exercisable.
In June 1997, the Company granted to Robert D. Selvi, Vice President Finance
and Chief Financial Officer of the Company, an incentive stock option to
purchase 251,693 shares of Common Stock at $4.50 per share, subject to the
vesting provisions under the 1993 Plan. Pursuant to a severance agreement
entered into with Mr. Selvi, in the event that Mr. Selvi is terminated other
than voluntarily or for cause, he shall be entitled to receive (i) his base
salary as then in effect for a period of six months ($86,400 based on Mr.
Selvi's current salary) plus any targeted bonus amount pro rated for such six
months period as determined by the Board of Directors and (ii) the option
granted to him for 251,693 shares of Common Stock will continue to vest for an
additional 18 months following such termination. Termination other than for
cause includes constructive termination resulting from (i) the reduction of
rate of compensation, (ii) the reduction of the scope of Mr. Selvi's
engagement, (iii) the requirement that Mr. Selvi provide services at a
location more than 25 miles from the Company's current principal office
location or from Mr. Selvi's residence or (iv) subjection of Mr. Selvi to
unreasonable working conditions. In addition, if there is a change of control
of the Company and Mr. Selvi is terminated other than for cause within six
months following the effective date of such change of control, Mr. Selvi will
be entitled to a cash payment of an amount equal to six months of his base
salary as then in effect plus any targeted bonus amount pro rated for such six
month period and the option granted to him for 251,693 shares will be 100%
vested and exercisable. For purposes of Mr. Selvi's severance agreement, a
change in control is defined as (i) any person becoming the beneficial owner
of 50% or more of the total voting power of the Company's then outstanding
voting securities, (ii) a change in the composition of the Board of Directors
within a two year period such that a majority of the then current directors
are not directors as of the date of Mr. Selvi's agreement or nominated or
elected by a majority of such directors at the time of such nomination or
(iii) a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent at least 50% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation, or the stockholders of the Company approve
a plan of complete liquidation of the Company or an
49
<PAGE>
agreement for the sale or disposition by the Company of all or substantially
all the Company's assets.
Pursuant to the terms of his July 31, 1997 offer letter, Larry J. Fagg, Vice
President, Worldwide Sales of the Company is entitled, under specified
conditions, to partial acceleration of vesting of options to purchase 109,432
shares of the Company's Common Stock and certain severance and benefit
payments. In the event Mr. Fagg's employment is terminated other than for
cause following a change of control of the Company, 50% of the remaining
unvested shares of Mr. Fagg's original option grant will vest and become
immediately exercisable, Mr. Fagg will be entitled to receive a severance
payment equal to six month's base salary and commissions at target and he will
be entitled to continue to participate in the Company's benefit programs for a
period of six months after the effective date of his termination at no cost to
him. For purposes of Mr. Fagg's employment, a change in control of the Company
is defined as the acceptance by the Company of any offer that would result in
the acquiror owning more than 50% of the Company's assets or voting stock then
outstanding.
50
<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES
Between March and December 1996, the Company sold 2,263,802 shares of Series
A Preferred Stock at a price of approximately $1.55 per share and 1,121,934
shares of Series B Preferred Stock at a price of $3.77 per share in private
placement transactions. In December 1996, the Company also issued a warrant
for the purchase of up to 50,000 shares of Series B Preferred Stock with an
exercise price of $3.77 per share plus a variable amount of shares of Series B
Preferred Stock (the "'Warrant"), subject to certain contingencies, at a price
to be determined at the time of issuance.
The purchasers of Preferred Stock and the Warrant were the following
stockholders of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF
PREFERRED STOCK(1)
------------------- AGGREGATE CASH
SERIES A SERIES B CONSIDERATION
--------- --------- --------------
<S> <C> <C> <C>
ENTITIES AFFILIATED WITH DIRECTOR LUCIO L.
LANZA
Venture capital funds affiliated with
U.S. Venture Partners .................... 2,257,010 279,644 $4,543,810
OTHER STOCKHOLDERS
Synopsys(2)................................ -- 841,448 3,172,259
2180 Associates Fund....................... 6,792 842 13,670
</TABLE>
- --------
(1) The purchasers of these securities are entitled to registration rights.
See "Description of Capital Stock--Registration Rights."
(2) Excludes a warrant to purchase 50,000 shares plus a number of additional
shares to address dilution resulting from the exercise of options
outstanding as of December 16, 1996 and a right of participation to raise
Synopsys' proportional interest in the Company's capital stock on an as-
converted basis to 9.9%.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND GREATER THAN 5%
STOCKHOLDERS
In September 1997, the Company issued an aggregate of 20,602 shares of
Common Stock to its employees as a stock bonus. The Company's executive
officers received shares of Common Stock in the following amounts:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Scott T. Becker................................................. 500
Dhrumil Gandhi.................................................. 500
Jeffrey A. Lewis................................................ 500
Daniel I. Rubin................................................. 500
Mark R. Templeton............................................... 500
Robert D. Selvi................................................. 125
Larry J. Fagg................................................... 42
</TABLE>
51
<PAGE>
On January 12, 1998, the Company granted options to purchase its Common
Stock to the following individuals at the exercise price per share shown:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE
STOCKHOLDER SHARES PRICE(1)
----------- ------- --------
<S> <C> <C>
Scott T. Becker........................................... 50,000 $7.70
Dhrumil Gandhi............................................ 50,000 $7.00
Duane R. Hook............................................. 35,000 $7.70
Jeffrey A. Lewis.......................................... 35,000 $7.00
John G. Malecki........................................... 35,000 $7.70
Daniel I. Rubin........................................... 20,000 $7.70
Mark R. Templeton......................................... 100,000 $7.70
</TABLE>
- --------
(1) Options granted to holders of 10% or more of the Company's Common Stock
have exercise prices of 110% of the fair market value of the Common Stock
on the date of grant.
The foregoing option grants become exercisable as to 25% of the option
shares on the first anniversary of the date of grant and as to 6.25% per
quarter thereafter, with full vesting occurring on the fourth anniversary of
the date of grant.
TRANSACTIONS WITH SYNOPSYS, INC.
In December 1996, Synopsys purchased 841,448 shares of Series B Preferred
Stock of the Company at a purchase price of $3.77 per share. In connection
with such purchase, Synopsys was granted certain registration rights. See
"Description of Capital Stock--Registration Rights." The Company also granted
Synopsys the Warrant to purchase 50,000 shares of Series B Preferred Stock (or
Common Stock in connection with an initial public offering) at a purchase
price of $3.77 per share, subject to adjustments for stock splits and the
like, as well as an additional variable amount of shares of Series B Preferred
Stock, at a price to be determined at the time of issuance of such shares. The
variable number of shares purchasable upon any exercise of the Warrant (the
"Additional Shares") is limited to such number of shares of Series B Preferred
Stock that, when combined with (x) the number of shares of Series B Preferred
Stock originally purchased by Synopsys, and (y) any additional shares of
Preferred Stock of the Company purchased by Synopsys after the date of
issuance of the Warrant in connection with such Warrant or otherwise, will
increase Synopsys' aggregate percentage ownership to 9.9% of the Company's
issued and outstanding capital stock at the time of such exercise. The
exercise price for the Additional Shares would vary depending on the event
that triggered the exercisability of the Warrant, and on an issuance of
Additional Shares in conjunction with an initial public offering, the exercise
price will be the public offering price per share less any underwriting
discounts and commissions. On November 17, 1997, Synopsys irrevocably
indicated its intention to exercise such Warrant for 50,000 shares upon the
closing of this Offering.
In connection with such financing the Company granted to Synopsys, for so
long as Synopsys holds at least 420,000 of the Company's stock, the right to
receive notice of and to designate a representative to attend the Board of
Directors of the Company in a nonvoting, observer capacity, subject to
exclusion for discussions about matters involving Synopsys or any competitor
of Synopsys, where attendance could adversely affect attorney client privilege
between the Company and its attorneys or if, in the discretion of the Board of
Directors, where attendance would violate the fiduciary duties of the Board of
Directors. The observer rights granted to Synopsys will terminate upon the
consummation of the Offering.
52
<PAGE>
In December 1996, the Company also entered into an OEM Agreement with
Synopsys (the "OEM Agreement"), pursuant to which the Company granted Synopsys
a nonexclusive, nontransferable, worldwide right to distribute certain of the
Company's technology, including certain products that are integrated with some
of Synopsys' technology. Synopsys is obligated to pay a royalty to the Company
in connection with the OEM Agreement, and Synopsys was granted the right to be
the exclusive seller of the products integrating both the Company's and
Synopsys' technology. A portion of such royalty payments were payable in
advance, with subsequent royalties due to the Company to offset such initial
payment. The Company does not anticipate recognizing any revenue under the OEM
Agreement. Under the agreement, Synopsys granted the Company a nonexclusive,
nontransferable license to use certain Synopsys products in connection
therewith. Pursuant to the OEM Agreement, the Company agreed to provide
certain engineering and porting services, as well as maintenance and support
services. The OEM Agreement has a five-year term and may be extended for an
additional 18 months. The OEM Agreement may be terminated by either party upon
the breach by the other party, or if the other party becomes insolvent, fails
to pay its debts or perform its obligations as they mature, admits in writing
to its insolvency or inability to pay its debts or perform its obligations as
they mature, or makes an assignment for the benefit of creditors. In addition,
either party may terminate the OEM Agreement upon eighteen months' written
notice to the other party. In the event that the Company terminates the OEM
Agreement as a result of a change of control of the Company, Synopsys will,
upon the occurrence of certain events, be entitled to have access to the
Company's source code for those products of the Company that are marketed by
Synopsys.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of December 31, 1997,
and as adjusted to reflect the sale of the securities offered by the Company
in the Offering, (i) by each person (or group of affiliated persons) who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Company's directors and Named Executive Officers
and (iii) by all directors and executive officers as a group. Except as
indicated in the footnotes to this table and subject to applicable community
property laws, the persons named in the table, based on information provided
by such persons, have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. If the
Underwriters' over-allotment option is exercised in full, the Selling
Stockholders will sell an aggregate of 370,000 shares of Common Stock in this
Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
NUMBER OF OWNED(1)
SHARES -----------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with U.S. Venture 2,536,654 27.7% 21.0%
Partners(2)....................................
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Duane R. Hook(3)................................ 1,000,500 10.9 8.3
1195 Bordeaux Drive
Sunnyvale, CA 94089
John G. Malecki(4).............................. 1,000,500 10.9 8.3
1195 Bordeaux Drive
Sunnyvale, CA 94089
Synopsys, Inc.(5)............................... 891,448 9.7 7.4
700 East Middlefield Road
Mountain View, CA 94043
Lucio L. Lanza(2)............................... 2,536,654 27.7 21.0
Mark R. Templeton............................... 961,753 10.5 8.0
Scott T. Becker(6).............................. 989,400 10.8 8.2
Daniel I. Rubin(7).............................. 995,500 10.9 8.2
Dhrumil Gandhi(8)............................... 350,280 3.8 2.9
Jeffrey A. Lewis(9)............................. 91,639 1.0 *
Dr. Eli Harari.................................. -- * *
All directors and executive officers as a group 5,925,393 63.0 48.1
(9 persons)(10)................................
</TABLE>
- --------
* Less than 1%.
(1) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on: (i) 9,174,075 shares outstanding as of
December 31, 1997, (ii) 12,074,075 shares outstanding after this Offering
and (iii) assumes no exercise of the Underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to such shares. All shares of Common Stock subject to
options currently exercisable or exercisable within 60 days after
December 31, 1997 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other
person.
(2) Includes 2,193,174 shares held by U.S. Venture Partners IV, L.P., 267,152
shares held by Second Ventures II, L.P. and 76,328 shares held by USVP
Entrepreneur Partners II, L.P. Mr. Lanza, a director of the Company, is a
general partner of these entities. Mr. Lanza disclaims beneficial
ownership of the shares held by the limited partnerships except to the
extent of his respective proportionate partnership interests therein. The
other general partners of each of U.S. Venture Partners IV, L.P., Second
Ventures II, L.P. and USVP Entrepreneur Partners II, L.P. are William K.
Bowes, Jr., Irwin B. Federman, Steven M. Krausz, Dale J. Vogel and Philip
M. Young.
54
<PAGE>
(3) Mr. Hook has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to acquire up to 100,000 shares of
Common Stock at the initial public offering price less the underwriting
discount solely for the purpose of covering over-allotments, if any. In
the event the Underwriters' over-allotment option is exercised in full,
Mr. Hook will beneficially own 900,500 shares of Common Stock,
representing 7.4% of the outstanding Common Stock following this
Offering.
(4) Mr. Malecki has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to acquire up to 50,000 shares of
Common Stock at the initial public offering price less the underwriting
discount solely for the purpose of covering over-allotments, if any. In
the event the Underwriters' over-allotment option is exercised in full,
Mr. Malecki will beneficially own 950,500 shares of Common Stock,
representing 7.8% of the outstanding Common Stock following this
Offering.
(5) Includes 50,000 shares subject to issuance under an outstanding warrant
upon the closing of this transaction.
(6) Includes 12,000 shares held in trust for Mr. Becker's children over which
Mr. Becker may be deemed to share voting and investment power. Mr. Becker
has granted the Underwriters an option, exercisable within 30 days of the
date of this Prospectus, to acquire up to 100,000 shares of Common Stock
at the initial public offering price less the underwriting discount
solely for the purpose of covering over-allotments, if any. In the event
the Underwriters' over-allotment option is exercised in full, Mr. Becker
will beneficially own 889,400 shares of Common Stock, representing 7.3%
of the outstanding Common Stock following this Offering.
(7) Includes 9,900 shares held in trust for Mr. Rubin's children over which
Mr. Rubin may be deemed to share voting and investment power. Mr. Rubin
has granted the Underwriters an option exercisable within 30 days of the
date of this Prospectus, to acquire up to 100,000 shares of Common Stock
at the initial offering price less the underwriting discount solely for
the purpose of covering over-allotments, if any. In the event the
Underwriters' over-allotment option is exercised in full, Mr. Rubin will
beneficially own 895,500 shares of Common Stock, representing 7.4% of the
outstanding Common Stock following this Offering.
(8) Includes 6,600 shares held in trust for Mr. Gandhi's children and 26,213
shares held in trust for the Gandhi Family Trust. Mr. Gandhi may be
deemed to share voting and investment power over each of these trusts.
Also includes 141,690 shares subject to outstanding options held by Mr.
Gandhi and exercisable within 60 days after December 31, 1997. Mr. Gandhi
has granted the Underwriters an option, exercisable within 30 days of the
date of this Prospectus, to acquire up to 20,000 shares of Common Stock
at the initial public offering price less the underwriting discount
solely for the purpose of covering over-allotments, if any. In the event
the Underwriters' over-allotment option is exercised in full, Mr. Gandhi
will beneficially own 330,280 shares of Common Stock, representing 2.7%
of the outstanding Common Stock following this Offering.
(9) Includes 91,139 shares subject to outstanding options held by Mr. Lewis
and exercisable within 60 days after December 31, 1997.
(10) Includes 232,829 shares subject to outstanding options exercisable within
60 days after December 31, 1997. See also notes 3, 4, 6 and 8 to this
table. In the event the Underwriters' over-allotment option is exercised
in full, the Company's directors and executive officers would
beneficially own 5,705,393 shares of Common Stock, representing 46.1% of
the outstanding Common Stock following this Offering.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this Offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, $0.001 par value, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value.
COMMON STOCK
As of January 12, 1997, there were 9,203,637 (including shares resulting
from the exercise of the warrant described below) shares of Common Stock
outstanding held of record by approximately 107 stockholders. As of January
12, 1997, options to purchase an aggregate of 2,103,549 shares of Common Stock
were also outstanding. See "Management--Stock Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders
of Preferred Stock, if any, the holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor.
Upon liquidation or dissolution of the Company, the remainder of the assets of
the Company will be distributed ratably among the holders of Common Stock
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
other subscription rights and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the shares to be sold in this Offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation effective after
conversion of previously outstanding shares of Preferred Stock into an
aggregate of 3,435,736 (assuming the exercise of the warrant described below)
shares of Common Stock which conversion will be effected simultaneously with
the consummation of this Offering, the Board of Directors has the authority
without further action by the stockholders to issue up to 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue such
Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by the Company's stockholders. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the market price of, and the voting and
other rights of, the holders of Common Stock. The Company has no current plans
to issue any shares of Preferred Stock.
WARRANTS
As of December 31, 1997, a warrant was outstanding to purchase an aggregate
of 50,000 shares of the Company's Series B Preferred Stock at an exercise
price of $3.77 per share and an additional, variable amount of Preferred Stock
at the initial public offering price less the underwriting discount. The
variable number of shares purchasable upon any exercise of the Warrant (the
"Additional Shares") is limited to such number of shares of Series B Preferred
Stock that, when combined with (x) the number of shares of Series B Preferred
Stock originally purchased by Synopsys, and (y) any additional shares of
Preferred Stock of the Company purchased by Synopsys after the date of
issuance of the Warrant in connection with such
56
<PAGE>
Warrant or otherwise, will increase Synopsys' aggregate percentage ownership
to 9.9% of the Company's issued and outstanding capital stock at the time of
such exercise. The exercise price for the Additional Shares would vary
depending on the event that triggered the exercisability of the Warrant and on
an issuance of Additional Shares in conjunction with an initial public
offering, the exercise price will be the public offering price per share less
any underwriting discounts and commissions. Synopsys has irrevocably indicated
its intention to exercise the Warrant solely for such 50,000 shares upon the
closing of this Offering.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation provides for cumulative voting
for the election of directors. Cumulative voting provides that each share of
stock normally having one vote is entitled to a number of votes equal to the
number of directors to be elected. A stockholder may then cast all such votes
for a single candidate or may allocate them among as many candidates as the
stockholder may choose. In the absence of cumulative voting, the holders of a
majority of the shares present or represented at a meeting in which directors
are to be elected would have the power to elect all the directors to be
elected at such meeting, and no person could be elected without the support of
holders of a majority of the shares present or represented at such meeting.
Section 141 of the Delaware General Corporation Law provides that a director
elected by cumulative voting generally may not be removed without cause if the
number of votes cast against removal would be sufficient to elect such
director under cumulative voting.
The Company's Bylaws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the
Company, including proposed nominations of persons for election to the Board
of Directors. Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting
by or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has given to the Company's Secretary timely
written notice, in proper form, of the stockholder's intention to bring that
business before the meeting. Although the Bylaws do not give the Board of
Directors the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at a special
or annual meeting of the stockholders, the Bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper
procedures are not followed or may discourage or defer a potential acquiror
from conducting a solicitation of proxies to elect its own slate of directors
or otherwise attempting to obtain control of the Company.
Under Delaware law, a special meeting of stockholders may be called by the
Board of Directors or by any other person authorized to do so in the
Certificate of Incorporation or the Bylaws. The Company's Bylaws authorize the
Board of Directors, the Chairman of the Board (or the Chief Executive Officer
in the Chairman's absence), or one or more stockholders holding in the
aggregate 10% of votes, to call a special meeting of stockholders. However,
the Board of Directors may amend the Bylaws at any time to eliminate the right
to call a special meeting of stockholders. The elimination of the right of
stockholders to call a special meeting would mean that a stockholder could not
force stockholder consideration of a proposal over the opposition of the Board
of Directors by calling a special meeting of stockholders prior to such time
as the Board of Directors believed such consideration to be appropriate or
until the next annual meeting provided that the requestor met the notice
requirements. The restriction on the ability of stockholders to call a special
meeting would mean that a proposal to replace the Board could be delayed until
the next annual meeting.
Under Delaware law, stockholders may execute an action by written consent in
lieu of a stockholder meeting. Delaware law permits a corporation to eliminate
such actions by written
57
<PAGE>
consent. Elimination of written consents of stockholders may lengthen the
amount of time required to take stockholder actions since certain actions by
written consent are not subject to the minimum notice requirement of a
stockholders' meeting. The elimination of stockholders' written consents,
however, deters hostile takeover attempts. Without the availability of
stockholder's actions by written consent, a holder or group of holders
controlling a majority in interest of the Company's capital stock would not be
able to amend the Company's Bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have
to call a stockholders' meeting and wait until the notice periods determined
by the Board of Directors pursuant to the Company's Bylaws prior to taking any
such action. The Company's Certificate of Incorporation provides for the
elimination of actions by written consent of stockholders upon the closing of
this Offering.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), a provision that, in general, prohibits a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years
after the date of the transaction in which the person became an "interested
stockholder," unless (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Section 203 defines business
combination to include: (i) any merger or consolidation involving the
corporation and the interested stockholder; (ii) any sale, transfer, pledge or
other disposition involving the interested stockholder of 10% or more of the
assets of the corporation; (iii) subject to certain exceptions, any
transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the interest stockholder; (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series of the corporation beneficially
owned by the interested stockholder; or (v) the receipt by the interested
stockholder of the benefit of any loans, advances guarantees, pledges or other
financial benefits provided by or through the corporation. In general, Section
203 defines an interested stockholder as any entity or person who, together
with affiliates and associates, beneficially owns (or within three years did
beneficially own) 15% or more of a corporation's voting stock. The statute
could prohibit or delay mergers or other takeover or change in control
attempts with respect to the Company and, accordingly, may discourage attempts
to acquire the Company.
REGISTRATION RIGHTS
The holders of approximately 3,435,736 shares of Common Stock (issuable upon
conversion of Preferred Stock or exercise of a warrant) and their permitted
transferees (the "Holders") are entitled to certain rights with respect to the
registration of such shares ("Registrable Securities") under the Securities
Act. Under the terms of an agreement between the Company and the Holders, the
holders of at least 40% of the Registrable Securities may require, on two
occasions
58
<PAGE>
after six months from the effective date of this Offering, that the Company
use its best efforts to register the Registrable Securities for public resale.
In addition, if the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, the Holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The holders of Registrable Securities may also require the
Company, no more than once in any 12 month period, to register all or a
portion of their Registrable Securities on Form S-3 under the Securities Act
when use of such form becomes available to the Company. All such registration
rights are subject to certain conditions and limitations, including the right
of the underwriters of an offering to limit the number of shares to be
included in such registration. In addition, the Company need not effect a
registration within three months following a previous registration or six
months following this Offering or more than the earlier of five years after
the closing of this Offering or such time as all Holders may sell under Rule
144 in a three month period all shares of Common Stock to which such
registration rights apply and the Holder owns less than 2% of the Company's
outstanding stock.
TRANSFER AGENT
The transfer agent for the Common Stock is BankBoston, N.A. Its address is
150 Royall Street, Canton, Massachusetts 02021, and its telephone number is
(617) 575-3120.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Sales of a substantial number of shares of Common Stock in the public
market following this Offering could adversely affect the prevailing market
prices from time to time. Furthermore, since only a limited number of shares
will be available for sale shortly after this Offering because of certain
contractual and legal restrictions on resale (as described below), sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
Upon completion of this Offering, the Company will have outstanding an
aggregate of 12,074,075 shares of Common Stock (based upon shares outstanding
at December 31, 1997), assuming no exercise of the Underwriters' over-
allotment option. Of these shares, all of the shares sold in this Offering
will be freely transferable without restriction or registration under the
Securities Act, except for any shares purchased by an existing "affiliate" of
the Company, as that term is defined in Rule 144 (an "Affiliate"), which
shares will be subject to the resale limitations of Rule 144. The remaining
9,174,075 shares of Common Stock held by existing stockholders are "restricted
shares" as that term is defined in Rule 144 (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144, Rule 144(k) or
Rule 701, which rules are summarized below. As a result of the contractual
restrictions described below and the provisions of Rule 144, Rule 144(k) and
Rule 701, the Restricted Shares will be available for sale in the public
market as follows: (i) no shares will be available for immediate sale on the
date of this Prospectus, (ii) approximately 9,124,075 shares will become
eligible for sale 180 days after the date of this Prospectus (assuming no
release from the lock-up agreements) upon expiration of lock-up agreements,
and (iii) approximately 50,000 shares will become eligible for sale one year
after the date of this Prospectus.
All officers, directors, optionholders and substantially all stockholders of
the Company have agreed not to sell, or otherwise transfer any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 180 days after the date of this Prospectus
(without, in most cases, the prior written consent of Deutsche Morgan Grenfell
Inc.). Deutsche Morgan Grenfell Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. Deutsche Morgan Grenfell Inc. currently has no plans to
release any portion of the securities subject to such lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 120,741 shares immediately after
this Offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of
any prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
60
<PAGE>
shares" may be sold immediately upon the completion of this Offering. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other
written agreement is eligible to resell such shares 90 days after the
effective date of this Offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained
in Rule 144.
Upon completion of this Offering, the holders of 3,435,736 shares of Common
Stock issuable upon conversion of Preferred Stock or exercise of a warrant, or
their transferees, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's stock plans and subject to outstanding options under the 1993 Plan.
See "Management--Stock Plans." Such registration statement is expected to be
filed and become effective as soon as practicable after the effective date of
this Offering. Shares of Common Stock issued upon exercise of options under
the Form S-8 will be available for sale in the public market, subject to Rule
144 volume limitations applicable to Affiliates and subject to the contractual
restrictions described above. At January 12, 1998, options to purchase
2,103,549 shares of Common Stock were outstanding, of which options to
purchase approximately 289,567 shares were then vested and exercisable.
Beginning 180 days after the effective date of this Offering, approximately
477,417 shares issuable upon the exercise of vested stock options will become
eligible for sale in the public market, if such options are exercised.
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<PAGE>
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C. are acting as
Representatives (the "Representatives"), have severally agreed, subject to the
terms and subject to the conditions in the Underwriting Agreement (the form of
which will be filed as an exhibit to the Company's Registration Statement of
which this Prospectus is a part), to purchase from the Company the respective
numbers of shares of Common Stock indicated opposite their respective names.
The Underwriters are committed to purchase all of the shares, if they purchase
any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Deutsche Morgan Grenfell Inc.......................................
Hambrecht & Quist LLC..............................................
Wessels, Arnold & Henderson, L.L.C.................................
---------
Total.......................................................... 2,900,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters
by counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters initially
propose to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers
(who may include the Underwriters) a concession not in excess of $ a share
under the initial public offering price. The selected dealers may reallow a
concession not in excess of $ a share to other dealers and other selling
terms may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part. The
Underwriters do not intend to sell any of the shares of Common Stock offered
hereby to accounts for which they exercise discretionary authority.
Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholders have granted to the Underwriters an option to purchase up to
65,000 and 370,000 additional shares of Common Stock, respectively, to cover
over-allotments, if any, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. Such
option is exercisable for 30 days from the date of this Prospectus. To the
extent such option is exercised, each Underwriter will be committed, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock offered hereby. The Selling Stockholders will be obligated,
pursuant to the option, to sell such shares to the Underwriters.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, optionholders and substantially
all stockholders of the Company have agreed not to sell or otherwise dispose
of Common Stock or convertible securities of the Company for up to 180 days
after the date of the final Prospectus without the prior consent of Deutsche
Morgan Grenfell Inc. The Company has agreed in the Underwriting Agreement that
it will not, directly or indirectly, without the prior written consent of
Deutsche Morgan Grenfell Inc., contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell,
62
<PAGE>
grant any option, right or warrant to purchase, or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for Common Stock, for a period of 180 days after the date of the
final Prospectus without the consent of Deutsche Morgan Grenfell Inc., except
under certain circumstances.
The Underwriting Agreement provides that the Company, and the Selling
Stockholders in the event the over-allotment option is exercised, will
indemnify the several Underwriters against certain liabilities, including
civil liabilities under the Securities Act, or will contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the initial public offering price include the
information set forth in this Prospectus and otherwise available to the
Representatives; the history and the prospects for the industry in which the
Company competes; the ability of the Company's management; the prospects for
future earnings of the Company; the present state of the Company's development
and its current financial condition; the general condition of the securities
markets at the time of this Offering; and the recent market prices of, and the
demand for, publicly traded common stock of generally comparable companies.
Each of the Representatives has informed the Company that it currently intends
to make a market in the shares subsequent to the effectiveness of this
Offering, but there can be no assurance that the Representatives will take any
action to make a market in any securities of the Company.
At the request of the Company, the Underwriters have reserved for sale at
the initial public offering price to persons designated by the Company a
number of shares of Common Stock not to exceed five percent of the total
number of shares of Common Stock in this Offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase these shares.
Certain persons participating in this Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with this Offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with this Offering when shares of Common Stock sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
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<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California 94304. Certain matters will be passed upon for the
Underwriters by Fenwick & West LLP, Palo Alto, California 94306.
EXPERTS
The financial statements of the Company as of September 30, 1996 and 1997
and for each of the three years in the period ended September 30, 1997
included in this Prospectus and the related financial statement schedule
included elsewhere in the registration statement have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1, including amendments
thereto, under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedule filed therewith. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to such Registration Statement
and to the exhibits and schedule filed therewith. Statements contained in this
Prospectus regarding the contents of any contract or other document referred
to are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedule filed herewith, may be inspected without charge at the principal
office of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part thereof may be obtained from such offices
upon the payment of the fees prescribed by the Commission. Such materials may
also be obtained from the Commission's World Wide Web site at
http://www.sec.gov.
Artisan, Process-Perfect and the Artisan logo are trademarks of the Company.
This Prospectus also includes product names and other trade names and
trademarks of the Company and of other organizations.
64
<PAGE>
ARTISAN COMPONENTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity ......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Artisan Components, Inc.
We have audited the accompanying balance sheets of Artisan Components, Inc.
as of September 30, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Artisan Components, Inc.
as of September 30, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 24, 1997, except for Notes 14 and 15,
for which the date is January 12, 1998.
F-2
<PAGE>
ARTISAN COMPONENTS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
-------------- ------------ 1997
1996 1997 1997 (NOTE 13)
------ ------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 709 $ 1,069 $ 1,037
Contract receivables (net of
allowance of zero, $275 and $275 at
September 30, 1996 and 1997 and
December 31, 1997, respectively)... 832 2,834 3,328
Marketable securities............... 1,249 2,499 2,499
Prepaid expenses and other current
assets............................. 343 564 807
------ ------- -------
Total current assets.............. 3,133 6,966 7,671
Marketable securities................. 1,000 986 --
Property and equipment, net........... 973 3,969 5,437
Deferred tax asset.................... 28 6 25
Other assets.......................... 38 84 344
------ ------- -------
Total assets...................... $5,172 $12,011 $13,477
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses........................... $ 375 $ 631 $ 1,184
Accrued warranty.................... -- 165 165
Deferred tax liability.............. 163 384 301
Deferred revenue.................... 327 1,434 2,012
------ ------- -------
Total current liabilities......... 865 2,614 3,662
Deferred rent......................... 15 49 47
Deferred revenue...................... -- -- 194
------ ------- -------
Total liabilities................. 880 2,663 3,903
------ ------- -------
Commitments (Note 8).
Stockholders' Equity:
Convertible Preferred Stock, $0.001
par value:
Authorized: 2,264, 3,436, 3,436 and
5,000 shares at September 30, 1996
and 1997, December 31, 1997 and pro
forma, respectively;
Issued and outstanding: 2,264,
3,386, 3,386 and none at September
30, 1996 and 1997, December 31,
1997 and pro forma, respectively... 3,478 7,564 7,564 $ --
(Liquidation value: $9,995 and
$10,522 at September 30 and
December 31, 1997)
Common Stock, $0.001 par value:
Authorized: 50,000 shares;
Issued and outstanding: 5,114,
5,644, 5,738 and 9,174 shares at
September 30, 1996 and 1997,
December 31, 1997 and pro forma,
respectively....................... 5 6 6 9
Warrant (none pro forma)............. -- 125 125 --
Additional paid in capital........... 528 647 654 8,340
Retained earnings.................... 281 1,006 1,225 1,225
------ ------- ------- ------
Total stockholders' equity........ 4,292 9,348 9,574 $9,574
------ ------- ------- ======
Total liabilities and
stockholders' equity............. $5,172 $12,011 $13,477
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ARTISAN COMPONENTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------- -------------
1995 1996 1997 1996 1997
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 2,718 $ 4,147 $ 8,912 $1,385 $3,329
Cost and expenses:
Cost of revenue.................. 984 1,280 2,855 425 1,024
Product development.............. 1,044 1,080 1,914 352 831
Sales and marketing.............. 272 603 2,019 353 785
General and administrative....... 415 611 1,340 185 455
-------- -------- -------- ------ ------
Total cost and expenses........ 2,715 3,574 8,128 1,315 3,095
-------- -------- -------- ------ ------
Operating income................... 3 573 784 70 234
Other income....................... -- 98 297 42 115
Interest expense................... -- 2 -- -- --
-------- -------- -------- ------ ------
Income before provision for income
taxes............................. 3 669 1,081 112 349
Provision for income taxes......... 36 137 356 37 130
-------- -------- -------- ------ ------
Net income (loss).................. $ (33) $ 532 $ 725 $ 75 $ 219
======== ======== ======== ====== ======
Basic earnings per share
(historical)...................... $ 0.11 $ 0.01 $ 0.03
======== ====== ======
Diluted earnings per share
(historical)...................... $ 0.08 $ 0.01 $ 0.02
======== ====== ======
Pro forma net income data
(unaudited) (Note 13):
Income before provision for
income taxes.................... $ 3 $ 669
Pro forma income tax benefit
(expense)....................... 18 (260)
-------- --------
Pro forma net income........... $ 21 $ 409
======== ========
Basic earnings per share (pro
forma)............................ $ 0.00 $ 0.07
======== ========
Diluted earnings per share (pro
forma)............................ $ 0.00 $ 0.05
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ARTISAN COMPONENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND FOR THE QUARTER ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT WARRANT CAPITAL EARNINGS TOTAL
------- -------- ------ ------ ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994. -- -- 5,009 $ 1 -- -- $ 585 $ 586
Options exercised........... -- -- 20 -- -- -- -- --
Distributions to
stockholders............... -- -- -- -- -- -- (143) (143)
Net loss.................... -- -- -- -- -- -- (33) (33)
------- -------- ----- --- ---- ---- ------ ------
Balance at September 30, 1995. -- -- 5,029 1 -- -- 409 410
Options exercised........... -- -- 85 -- -- 1 -- 1
Issuance of Series A
Preferred Stock, net of
issuance costs of $22...... 2,264 $3,478 -- -- -- -- -- 3,478
Distributions to
stockholders............... -- -- -- -- -- -- (129) (129)
Undistributed earnings of
S corporation reflected as
additional paid in capital
of the Company............. -- -- -- 4 -- 527 (531) --
Net income.................. -- -- -- -- -- -- 532 532
------- -------- ----- --- ---- ---- ------ ------
Balance at September 30, 1996. 2,264 3,478 5,114 5 -- 528 281 4,292
Options exercised........... -- -- 510 1 -- 16 -- 17
Issuance of Series B
Preferred Stock, net of
issuance costs of $19...... 1,122 4,086 -- -- -- -- -- 4,086
Issuance of Common Stock to
employees as a stock bonus. -- -- 20 -- -- 103 -- 103
Issuance of Warrant......... -- -- -- -- $125 -- -- 125
Net income.................. -- -- -- -- -- -- 725 725
------- -------- ----- --- ---- ---- ------ ------
Balance at September 30, 1997. 3,386 $ 7,564 5,644 $ 6 $125 $647 $1,006 $9,348
Options exercised........... -- -- 94 -- -- 7 -- 7
Net income.................. -- -- -- -- -- -- 219 219
------- -------- ----- --- ---- ---- ------ ------
Balance at December 31, 1997
(unaudited).................. 3,386 $ 7,564 5,738 $ 6 $125 $654 $1,225 $9,574
======= ======== ===== === ==== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ARTISAN COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTERS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------- ----------------
1995 1996 1997 1996 1997
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ (33) $ 532 $ 725 $ 75 $ 219
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............... 167 250 777 104 310
Loss on sale of fixed
assets..................... 2 -- -- -- --
Provision for doubtful
accounts................... -- -- 275 -- --
Issuance of Common Stock to
employees as a stock bonus. -- -- 103 -- --
Changes in assets and
liabilities:
Contract receivables...... (1,308) 86 (2,277) (790) (494)
Deferred revenue.......... 1,007 (250) 1,107 626 772
Prepaid expenses and other
assets................... 99 (297) (267) 137 (503)
Deferred rent............. -- 15 34 10 (2)
Deferred taxes............ -- 135 243 52 (102)
Accounts payable and
accrued expenses......... 21 95 37 (201) 503
------- -------- -------- ------- -------
Net cash provided by
(used in) operating
activities............. (45) 566 757 13 703
------- -------- -------- ------- -------
Cash flows from investing
activities:
Acquisition of property and
equipment.................... (90) (777) (3,389) (58) (1,728)
Proceeds from sale of property
and equipment................ 4 12 -- -- --
Purchase of marketable
securities................... -- (4,255) (5,692) (299) --
Proceeds from sales of
marketable securities........ -- 2,007 4,456 249 986
------- -------- -------- ------- -------
Net cash used in
investing activities... (86) (3,013) (4,625) (108) (742)
------- -------- -------- ------- -------
Cash flows from financing
activities:
Borrowings from line of
credit....................... 200 445 -- -- --
Repayments on line of credit.. -- (645) -- -- --
Net proceeds from issuance of
Series A Preferred Stock..... -- 3,478 -- -- --
Net proceeds from issuance of
Series B Preferred Stock and
Warrant...................... -- -- 4,211 4,211 --
Proceeds from issuance of
Common Stock................. -- 1 17 -- 7
Distributions to stockholders. (143) (129) -- 10 --
------- -------- -------- ------- -------
Net cash provided by
financing activities... 57 3,150 4,228 4,221 7
------- -------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents........... (74) 703 360 4,126 (32)
Cash and cash equivalents,
beginning of period............ 80 6 709 709 1,069
------- -------- -------- ------- -------
Cash and cash equivalents, end
of period...................... $ 6 $ 709 $ 1,069 $ 4,835 $ 1,037
======= ======== ======== ======= =======
CASH PAID FOR:
Income taxes.................. $ 1 $ 2 $ 2 $ 1 $ 10
======= ======== ======== ======= =======
Interest paid................. $ -- $ 2 $ -- $ -- $ --
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITIES:
Fixed asset acquisitions in
exchange for accounts
payable...................... $ -- $ 208 $ 384 $ 208 $ 50
======= ======== ======== ======= =======
Issuance of Common Stock to
employees as a stock bonus... $ -- $ -- $ 103 $ -- $ --
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Artisan Components, Inc. (formerly VLSI Libraries Incorporated) (the
"Company") was incorporated in April 1991 to develop high performance, low
power and high density embedded memories and other intellectual property
("IP") components for the design and manufacture of complex integrated
circuits ("ICs"). The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used
in complex, high volume applications, such as portable computing devices,
cellular phones, consumer multimedia products, automotive electronics,
personal computers and workstations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
REVENUE AND COST OF REVENUE
Revenue consists of license fees for the Company's IP component products
which are customized to each customer's manufacturing process. The license
period is typically twenty years. The Company warrants that the licensed
products shall be free from defects in media and conform to customer's
specifications. The warranty period is typically 90 days but can extend to a
maximum of one year. Some licenses provide for ongoing product support that
consists of an identified customer contact at the Company and telephonic or e-
mail product support. No upgrades or modifications to the licensed product are
provided. The product support period is generally three years. Revenue from
license fees is recognized based on the percentage of completion method for
the majority of the Company's contracts. Under this method, provisions for
estimated losses on uncompleted contracts are recognized in the period in
which the likelihood of such losses is determined. Under certain contracts
where the costs cannot be estimated, the completed contract method is
utilized.
Cost of revenue is primarily comprised of salaries and benefits of employees
assigned to the contracts and is allocated based on the amount of time devoted
to each contract by the employees and includes an accrual for warranty and
product support costs.
PRODUCT DEVELOPMENT
Product development expenses are charged to operations as incurred.
EARNINGS PER SHARE (EPS)--SEE NOTE 14
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
with one major financial institution.
F-7
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities and
are carried at fair value, based on quoted market prices, with the unrealized
gains or losses, net of tax, reported in stockholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, both of which are included in interest income.
Realized gains and losses are recorded using the specific identification
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight line basis over their
respective estimated useful lives of three to five years. Leasehold
improvements are amortized on a straight line basis over the shorter of their
respective estimated useful lives or the terms of their respective leases.
Upon disposal, assets and related accumulated depreciation are removed from
the accounts and the related gain or loss is included in results from
operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Unaudited Interim Financial Information
The accompanying interim balance sheet as of December 31, 1997 and the
statements of operations and cash flows for the quarters ended December 31,
1996 and 1997 together with the related notes are unaudited but include all
adjustments, consisting of only normal recurring adjustments, which the
Company considers necessary to present fairly, in all material respects, the
financial position, the results of operations and cash flows for the quarters
ended December 31, 1996 and 1997. Results for the quarters ended December 31,
1996 and 1997 are not necessarily indicative of results for an entire year.
Recent Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("SFAS 130"). This statement establishes standards for reporting and display
of comprehensive income and its components (revenue, expenses and gains and
losses) in a full set of financial statements and becomes effective for fiscal
years beginning after December 31, 1997.
In June 1997, the FASB issued SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 changes current
practice under SFAS 14 by establishing a new framework on which to base
segment reporting (referred to as the "management" approach) and also requires
interim reporting of segment information. It is effective for the Company's
fiscal year 1999.
The Company is currently studying the impact of these pronouncements.
F-8
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. BUSINESS RISKS AND CREDIT CONCENTRATION:
The Company operates in an intensely competitive industry that has been
characterized by rapid technological change, short product life cycles,
cyclical market patterns and heightened foreign and domestic competition.
Significant technological changes in the industry could affect operating
results adversely.
The Company markets and sells its technology to a narrow base of customers
and generally does not require collateral. At September 30, 1997, four
customers accounted for 36%, 20%, 15% and 14%, respectively, of contract
receivables. At September 30, 1996, five customers accounted for 24%, 24%,
15%, 12% and 12%, respectively, of contract receivables. At December 31, 1997,
four customers accounted for 30%, 27%, 19% and 11%, respectively, of contract
receivables.
As of December 31, 1997, the Company's cash and cash equivalents were
deposited with one major financial institution in the form of demand deposits
and money market accounts.
Financial instruments that potentially subject the Company to concentrations
of credit risk comprise principally cash and cash equivalents, marketable
securities and contract receivables. The Company invests its excess cash
primarily in U.S. government agency and treasury notes that mature within one
year.
4. CONTRACT RECEIVABLES:
Contract receivables were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------
1996 1997 1997
------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accounts receivable....................... $ 269 $ 1,092 $2,185
Unbilled contract receivables............. 563 2,017 1,418
----- ------- ------
832 3,109 3,603
Allowance for doubtful accounts........... -- (275) (275)
----- ------- ------
$ 832 $ 2,834 $3,328
===== ======= ======
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------
1996 1997 1997
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software.............. $1,339 $ 3,969 $ 4,448
Office furniture............................. 197 288 643
Leasehold improvements....................... 44 1,096 2,040
------ ------- -------
1,580 5,353 7,131
Accumulated depreciation and amortization.... (607) (1,384) (1,694)
------ ------- -------
$ 973 $ 3,969 $ 5,437
====== ======= =======
</TABLE>
Depreciation and amortization expense was $167,000, $250,000, $777,000,
$104,000 and $310,000 for the years ended September 30, 1995, 1996 and 1997
and the quarters ended December 31, 1996 and 1997, respectively.
F-9
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. MARKETABLE SECURITIES:
Marketable securities, classified as available-for-sale securities, included
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1997 1997
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Short term investments:
U.S. Government Securities.................... $1,249 $2,499 $2,499
====== ====== ======
Long term investments:
U.S. Government Securities.................... $1,000 $ 986 $ --
====== ====== ======
</TABLE>
All short term investments have maturities of less than one year from the
respective balance sheet date. Long term investments at September 30, 1997
mature on December 15, 1998.
The cost of marketable securities approximates fair value of the securities
and there are no unrealized holding gains or losses.
7. LINE OF CREDIT:
The Company's bank line of credit provides for borrowings of up to $300,000,
bears interest at the Bank's prime rate plus 1.75% (8.25%, 8.50% and 8.50% at
September 30, 1996 and 1997 and December 31, 1997, respectively), and expires
on February 28, 1998. There were no borrowings under this line as of September
30, 1996 and 1997, and December 31, 1997. Any outstanding amounts under the
line of credit would be collateralized by substantially all of the Company's
assets.
8. COMMITMENTS:
The Company rents its new office facility in Sunnyvale under a noncancelable
operating lease that expires in 2004. Under the terms of the lease, the
Company is responsible for its share of taxes, insurance and common area
maintenance costs.
At September 30, 1997, future minimum annual lease payments under this lease
were as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 431
1999................................................................ 451
2000................................................................ 470
2001................................................................ 490
2002................................................................ 509
and thereafter...................................................... 1,078
------
$3,429
======
</TABLE>
The Company continues to lease its previous office facility in San Jose
under a noncancelable lease that expires in 2001. In October 1997, the Company
entered into a sublease arrangement with respect to the old office facility.
This arrangement expires in 2001 with the subtenant assuming the lease
obligation of the Company.
F-10
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS, CONTINUED:
Future minimum annual lease payments and future minimum annual rental income
in respect of this property are as follows (in thousands):
<TABLE>
<CAPTION>
LEASE RENTAL
PAYMENT INCOME
------- ------
<S> <C> <C>
1998........................................................ $ 314 $ 314
1999........................................................ 330 330
2000........................................................ 347 347
2001........................................................ 148 148
------ ------
$1,139 $1,139
====== ======
</TABLE>
Rent expense was $201,000, $324,000, $442,000, $104,000 and $123,000 for the
fiscal years ended September 30, 1995, 1996 and 1997, and for the quarters
ended December 31, 1996 and 1997, respectively.
9. STOCKHOLDERS' EQUITY
Stock Splits
During January 1997, the Board of Directors declared a two-for-one Common
Stock and convertible Series A and Series B Preferred Stock split. In November
1997, the Board of Directors declared a one-for-two reverse Common Stock and
convertible Series A and Series B Preferred Stock split. All share data
including stock option plan information is restated to reflect the stock
splits.
At September 30, 1996 and 1997, convertible Preferred Stock consisted of the
following (in thousands):
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES ISSUED
AUTHORIZED AND OUTSTANDING PROCEEDS, NET
----------------------- --------------------- -------------------
SERIES 1996 1997 1996 1997 1996 1997
------ -------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
A 2,264 2,264 2,264 2,264 $3,478 $3,478
B -- 1,172 -- 1,122 -- 4,086
-------- -------- ------- ------- ------ ------
2,264 3,436 2,264 3,386 $3,478 $7,564
======== ======== ======= ======= ====== ======
</TABLE>
The rights, preferences and privileges of the Preferred Stockholders are as
follows:
Dividends
The holders of Series A and Series B Preferred Stock are entitled to
dividends in preference to Common Stockholders of $0.15461 and $0.377 per
annum, respectively. Any dividends would be noncumulative and no right to such
dividends would accrue to holders of Preferred Stock unless declared by the
Board of Directors. As of September 30, 1997, no dividends have been declared.
F-11
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY, CONTINUED:
Conversion, Participation and Registration
The Series A and Series B Preferred Stock is convertible, at the option of
the holders, at any time, into Common Stock at conversion values of $1.5461
and $3.77, respectively, subject to certain antidilution adjustments.
Conversion is automatic upon the closing of a firm commitment underwritten
public offering having an aggregate offering price of at least $10,000,000.
The Preferred Stockholders have certain registration rights and the right to
participate in future issuances of the Company's stock. Additionally, the
Preferred Stockholders have the right of first refusal and the right to
participate, should the major Common Stockholder sell shares, which rights
also terminate upon the closing of a firm commitment underwritten public
offering. The Company has reserved 3,385,736 shares of Common Stock in the
event of conversion.
Voting
Each share of Series A and Series B Preferred Stock has voting rights equal
to the number of Common Stock into which it converts. In addition, the holders
of Series A Preferred Stock have the right to elect two members of the Board
of Directors and the major Common Stockholder has the right to elect two
members of the Board of Directors. The remaining director is elected by
holders of both classes of stock.
Liquidation
The holders of Series A and Series B Preferred Stock are entitled to a
preference in liquidation to Common Stockholders of $1.5461 and $3.77 per
share, respectively, plus declared but unpaid dividends. After the above
amounts have been paid on the Preferred Stock, the remaining assets are
distributed to the holders of the Common Stock. If liquidation occurs prior to
March 20, 1999, the above preferences will also include an amount equal to a
25% rate of return on the original purchase price, compounded annually, from
the date of issuance.
Warrant
In connection with the issuance of the Series B Preferred Stock the Company
issued a warrant to purchase an aggregate of 50,000 shares of Series B
Preferred Stock at an exercise price of $3.77 and an additional, variable
amount of Series B Preferred Stock, at a price to be determined at the time of
issuance of such shares. The variable number of shares purchasable upon any
exercise of the warrant (the "Additional Shares") is limited to such number of
shares of Series B Preferred Stock that, when combined with (x) the number of
shares of Series B Preferred Stock originally purchased by Synopsys, and (y)
any additional shares of Preferred Stock of the Company purchased by Synopsys
after the date of issuance of the warrant in connection with such warrant or
otherwise, will increase Synopsys' aggregate percentage ownership to 9.9% of
the Company's issued and outstanding capital stock at the time of such
exercise. The exercise price for the Additional Shares would vary depending on
the event that triggered the exercisability of the warrant and on an issuance
of Additional Shares in conjunction with an initial public offering, the
exercise price will be the public offering price per share less any
underwriting discounts and commissions. The Company has reserved 50,000 shares
of Common Stock for issuance upon exercise of the warrant.
F-12
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY, CONTINUED:
Stock Option Plan
The Company had reserved 2,291,396 shares of its Common Stock under its 1993
Stock Option Plan, as amended (the "1993 Plan") for issuance upon the exercise
of nonstatutory and incentive stock options to employees and consultants as of
September 30, 1997. In November 1997, the Board of Directors also authorized
and the stockholders approved, the reservation of an additional two million
shares for issuance under the 1993 Plan. The 1993 Plan expires in 2003.
Options to purchase the Company's Common Stock may be granted at a price not
less than 85% of fair market value in the case of nonstatutory stock options,
and at fair market value in the case of incentive stock options. Fair market
value is determined by the Board of Directors. Options become exercisable as
determined by the Board of Directors but generally at a rate of 25% after the
first year and 6.25% each quarter thereafter. Options expire as determined by
the Board of Directors but not more than ten years after the date of grant.
Stock Option Plan
Activity under the Plan was as follows (in thousands except per share data):
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OUTSTANDING AVERAGE
SHARES ---------------------------- EXERCISE
AVAILABLE NUMBER PRICE PER PRICE
FOR GRANT OF SHARES SHARE TOTAL PER SHARE
--------- --------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1994........................ 750 611 $0.01 $ 6 $0.01
Granted.................... (212) 212 $0.01 2 $0.01
Exercised.................. -- (20) $0.01 -- $0.01
Canceled................... 226 (226) $0.01 (2) $0.01
----- ----- ------
Balance at September 30,
1995........................ 764 577 $0.01 6 $0.01
Additional shares reserved
for issuance.............. 422 -- -- --
Granted.................... (598) 598 $0.01-$0.15 47 $0.0784
Exercised.................. -- (85) $0.01 (1) $0.01
Canceled................... 4 (4) $0.01 -- $0.01
----- ----- ------
Balance at September 30,
1996........................ 592 1,086 $0.01-$0.15 52 $0.0477
Additional shares reserved
for issuance.............. 400 -- -- --
Granted.................... (831) 831 $0.15-$5.00 2,165 $2.6052
Exercised.................. -- (510) $0.01-$0.05 (17) $0.034
----- ----- ------
Balance at September 30,
1997........................ 161 1,407 $0.01-$5.00 2,200 $1.5634
Additional shares reserved
for issuance.............. 2,000 -- -- -- --
Granted.................... (123) 123 $5.00-$7.00 707 $5.75
Exercised.................. -- (95) $0.01-$2.00 (7) $0.0702
Canceled................... 34 (34) $0.15-$2.00 (14) $0.4191
----- ----- ------
Balance at December 31, 1997
(unaudited)................. 2,072 1,401 $0.01-$7.00 $2,886 $2.0593
===== ===== ======
</TABLE>
At September 30, 1995, 1996 and 1997, and December 31, 1997, options to
purchase 225,917, 303,235, 291,011 and 289,567 shares of Common Stock,
respectively, were exercisable.
F-13
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY, CONTINUED:
Stock Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the 1993 Plan. Had compensation expense been determined at the
fair value on the grant dates for awards under the Plan consistent with the
method of SFAS No. 123, the Company's net income in 1996 and 1997 would have
been reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Net income
As reported, pro forma in 1996 and historical in 1997....... $ 409 $ 725
Pro forma................................................... $ 405 $ 699
Net income per share
As reported, pro forma in 1996 and historical in 1997
Basic earnings per share................................... $ 0.07 $ 0.11
Diluted earnings per share................................. $ 0.05 $ 0.08
Pro forma
Basic earnings per share................................... $ 0.07 $ 0.11
Diluted earnings per share................................. $ 0.05 $ 0.07
</TABLE>
Such difference may not be representative of future compensation cost because
options vest over several years and additional grants are made each year.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk-free interest rate.................................... 5.65% 6.25%
Expected average life...................................... 5 years 5 years
Expected dividends......................................... -- --
Expected volatility........................................ 0% 0%
</TABLE>
The expected average life is based upon the assumption that the stock
options, on average, are exercised one year after they are fully vested. The
weighted average remaining contract life was 9.3 and 8.9 years, as of
September 30, 1996 and 1997, respectively.
F-14
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCKHOLDERS' EQUITY, CONTINUED:
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01-$1.00 809 8.19 $0.110 289 $0.112
$2.00-$3.50 47 9.25 $2.493 1 $3.500
$4.50-$5.00 477 9.55 $4.710 -- --
$6.00-$7.00 68 9.90 $6.362 -- --
----- ---
1,401 8.77 $2.059 290 $0.116
===== ===
</TABLE>
10. INCOME TAXES:
Prior to March 1996, the Company was organized as a subchapter S corporation
and profits and losses for these periods flowed through to the shareholders.
Deferred tax assets and liabilities associated with temporary differences at
the termination of S corporation status were recorded with a corresponding
charge to provision for income taxes. Taxes reflected in the 1995 financial
statements represent foreign income and franchise taxes imposed on S
corporations by California.
The provision for income taxes was comprised (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Federal:
Current........................................................ $ -- $ --
Deferred....................................................... 114 181
---- ----
114 181
State:
Current........................................................ 3 --
Deferred....................................................... 20 49
---- ----
23 49
Foreign:
Current........................................................ -- 126
---- ----
Total........................................................ $137 $356
==== ====
</TABLE>
The Company's effective tax rate on pretax income differed from the U.S.
federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ----- ----
<S> <C> <C> <C>
Provision at U.S. federal statutory rate............. 34.0% 34.0% 34.0%
State tax net of federal benefit..................... 32.3 3.4 4.2
Non-taxable S corporation earnings................... (34.0) (16.0) --
Research and development tax credit.................. -- (0.9) (5.3)
Foreign taxes........................................ 1,167.7 -- --
------- ----- ----
1,200.0% 20.5% 32.9%
======= ===== ====
</TABLE>
F-15
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES, CONTINUED:
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities as of September 30, was as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
DEFERRED TAX ASSETS:
Current:
Net operating loss carryforwards.......................... $ 9 $ --
Research and development credits.......................... 14 85
Other credits............................................. -- 8
State taxes............................................... 1 --
----- -----
24 93
Non current:
Depreciation and amortization............................. 28 6
----- -----
52 99
DEFERRED TAX LIABILITIES:
Current:
Accrual to cash conversion................................ (187) (477)
----- -----
Net deferred tax liability.................................. $(135) $(378)
===== =====
</TABLE>
11. SEGMENT REPORTING:
The Company operates in one industry segment.
The distribution of revenues by geographic area was as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTERS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- -------------
1995 1996 1997 1996 1997
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS:
North America......................... $ 1,222 $ 2,180 $ 2,923 $ 600 $1,345
Europe................................ 737 944 2,873 483 541
Asia.................................. 759 1,023 3,116 302 1,443
-------- -------- -------- ------ ------
$ 2,718 $ 4,147 $ 8,912 $1,385 $3,329
======== ======== ======== ====== ======
</TABLE>
F-16
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SEGMENT REPORTING, CONTINUED:
Revenue from individual customers in excess of 10% of revenue was as follows
(in thousands, except percent data):
<TABLE>
<CAPTION>
QUARTERS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------- -----------------------------
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A... 20% $552 20% $ 836 27% $2,362 -- -- 16% $541
B... 17% 466 -- -- 13% 1,145 11% $155 14% 451
C... 17% 456 10% 395 -- -- -- -- -- --
D... 11% 292 -- -- -- -- -- -- -- --
E... 10% 274 -- -- -- -- -- -- -- --
F... -- -- 15% 627 16% 1,388 -- -- 21% 681
G... -- -- 37% 1,533 -- -- 25% 340 17% 574
H... -- -- -- -- 24% 2,167 19% 261 18% 602
I. -- -- -- -- -- -- 20% 282 -- --
</TABLE>
12. BENEFIT PLAN:
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") for
substantially all employees. The 401(k) Plan provides for profit sharing
contributions to be made at the discretion of the Company's Board of
Directors. The Company did not elect to make a profit sharing contribution for
fiscal 1995, 1996 or 1997.
The 401(k) Plan also provides for elective employee salary reduction
contributions and Company matching of employees' contributions. Employees may
contribute up to 15% of elective compensation. The Company's matching
contribution is at the discretion of the Company's Board of Directors. The
Company's matching contributions were $36,838, $39,756 and $74,017 for fiscal
1995, 1996 and 1997, respectively.
13. UNAUDITED PRO FORMA DATA:
The statement of operations includes pro forma tax expense to reflect tax
expense as if the Company had been a C corporation in fiscal 1995 and 1996.
The components of the pro forma tax benefit (expense) consisted of (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1995 1996
------ -------
<S> <C> <C>
Federal:
Deferred................................................ $ 18 $ (222)
State:
Current................................................. 1 (1)
Deferred................................................ (1) (37)
Foreign:
Current................................................. 32 --
Deferred................................................ (32) --
------ -------
Tax benefit (expense)................................. $ 18 $ (260)
====== =======
</TABLE>
F-17
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. UNAUDITED PRO FORMA DATA, CONTINUED:
Upon the closing of an initial public offering of the Company's Common Stock
that meets the criteria set out in Note 9, all the convertible Preferred Stock
and warrant outstanding will convert into an aggregate of 3,435,736 shares of
Common Stock. At December 31, 1997, the unaudited pro forma stockholders'
equity is adjusted for the conversion of the convertible Preferred Stock and
warrant outstanding at December 31, 1997 and is disclosed on the face of the
balance sheets.
14. EARNINGS PER SHARE (EPS) DISCLOSURES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon the
conversion of convertible preferred stock (using the "if converted" method)
and exercise of stock options and warrants for all periods. All prior period
earnings per share amounts have been restated to comply with the SFAS 128.
The Company has computed common and common equivalent shares in determining
the number of shares used in calculating earnings per share for all periods
presented pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 83. SAB 83 requires the Company to include all common
shares and all common equivalent shares issued during the 12 month period
preceding the filing date of an initial public offering in its calculation of
the number of shares used to determine basic and diluted earnings per share as
if the shares had been outstanding for all periods presented.
F-18
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. EARNINGS PER SHARE (EPS) DISCLOSURES, CONTINUED:
In accordance with the disclosure requirements of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
QUARTERS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------
1995 1996 1997 1996 1997
---------------- --------------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--Basic and Diluted EPS
Net income (historical)............. $ 725 $ 75 $ 219
======= ======= =======
Pro forma net income (unaudited).... $ 21 $ 409
======= ========
Denominator--Basic EPS
Common stock outstanding............ 5,018 5,040 5,456 5,121 5,705
Common equivalent stock issued
pursuant to Staff Accounting
Bulletin No. 83.................... 927 927 927 927 927
------- -------- ------- ------- -------
5,945 5,967 6,383 6,048 6,632
------- -------- ------- ------- -------
Basic earnings per share.............. $ 0.00 $ 0.07 $ 0.11 $ 0.01 $ 0.03
======= ======== ======= ======= =======
Denominator--Diluted EPS
Denominator--Basic EPS.............. 5,945 5,967 6,383 6,048 6,632
Effect of Dilutive Securities:
Common stock options.............. -- 773 881 919 809
Convertible preferred stock....... -- 1,197 2,264 2,264 2,264
------- -------- ------- ------- -------
5,945 7,937 9,528 9,231 9,705
------- -------- ------- ------- -------
Diluted earnings per share............ $ 0.00 $ 0.05 $ 0.08 $ 0.01 $ 0.02
======= ======== ======= ======= =======
</TABLE>
F-19
<PAGE>
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS:
In November 1997, the Board of Directors and the stockholders approved the
reincorporation of the Company in Delaware. Under the new Certificate of
Incorporation in Delaware, the Company is authorized to issue 50,000,000
shares of Common Stock at $0.001 par value and 5,000,000 shares of Preferred
Stock at $0.001 par value. The reincorporation occurred on January 9, 1998.
In November 1997, the Board of Directors and the stockholders authorized
management of the Company to file a Registration Statement with the Securities
and Exchange Commission relating to a public offering of the Company's Common
Stock.
In November 1997, the Board of Directors and the stockholders also approved
the adoption of a 1997 Employee Stock Purchase Plan and the adoption of a 1997
Director Option Plan. The Board of Directors also authorized, and the
stockholders approved, the reservation of an additional two million shares for
issuance under the 1993 Plan.
The 1997 Employee Stock Purchase Plan authorizes the granting of stock
purchase rights to eligible employees during two-year offering periods with
exercise dates approximately every six months. The Board of Directors reserved
600,000 shares of common stock for issuance under the plan. Shares are
purchased through employees' payroll deductions at purchase prices equal to
85% of the lesser of the fair market value of the Company's Common Stock at
either the first day of each offering period or the date of purchase.
A total of 200,000 shares of Common Stock have been reserved for issuance
under the 1997 Director Option Plan.
On January 12, 1998, the Company granted options to purchase 491,700 shares
and 240,000 shares of Common Stock at exercise prices of $7.00 and $7.70 per
share, respectively.
A total of 29,562 options have been exercised during the period from January
1, 1998 to January 12, 1998 at a weighted average exercise price of $0.01.
F-20
<PAGE>
[LOGO OF ARTISAN COMPONENTS]
Customers Include Many Of The World's Leading Semiconductor Manufacturers
<TABLE>
<CAPTION>
PROCESS TECHNOLOGIES
---------------------------------
CUSTOMERS 0.6(micron) 0.5(micron) 0.35(micron) 0.25(micron)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Analog Devices X
------------------------------------------------------------------------------------
ATI Technologies X X X X
------------------------------------------------------------------------------------
Chartered X
------------------------------------------------------------------------------------
Fujitsu X X
------------------------------------------------------------------------------------
GEC Plessey X X
------------------------------------------------------------------------------------
LSI Logic X X
------------------------------------------------------------------------------------
NEC X X
------------------------------------------------------------------------------------
Newport Wafer Fab X X
------------------------------------------------------------------------------------
OKI Electric X X X
------------------------------------------------------------------------------------
SGS-THOMSON X X X
------------------------------------------------------------------------------------
Toshiba X
------------------------------------------------------------------------------------
TSMC X
------------------------------------------------------------------------------------
VLSI Technology X
</TABLE>
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 3
The Company ........................................................... 4
Risk Factors .......................................................... 5
Use of Proceeds ....................................................... 15
Dividend Policy ....................................................... 15
Capitalization ........................................................ 16
Dilution .............................................................. 17
Selected Financial Data ............................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................ 19
Business .............................................................. 29
Management............................................................. 40
Certain Transactions .................................................. 51
Principal Stockholders ................................................ 54
Description of Capital Stock .......................................... 56
Shares Eligible for Future Sale ....................................... 60
Underwriting .......................................................... 62
Legal Matters ......................................................... 64
Experts ............................................................... 64
Additional Information ................................................ 64
Index to Financial Statements.......................................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
[LOGO OF ARTISAN COMPONENTS]
2,900,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
PROSPECTUS
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discount, payable by the Registrant in connection with the sale of the Common
Stock being registered. All the amounts shown are estimates, except for the
registration fee, the NASD fee and the Nasdaq National Market filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- --------
<S> <C>
Registration Fee...................................................... $ 9,096
NASD Filing Fee....................................................... 3,502
Nasdaq National Market Listing Fee.................................... 50,000
Blue Sky Fees and Expenses............................................ 10,000
Printing and Engraving Expenses....................................... 150,000
Legal Fees and Expenses............................................... 300,000
Accounting Fees and Expenses.......................................... 225,000
Transfer Agent and Registrar Fees..................................... 20,000
Miscellaneous expenses................................................ 82,402
--------
Total............................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Prior to its reincorporation in Delaware and as permitted by Section 204(a)
of the California General Corporation Law, the Registrant's Amended and
Restated Articles of Incorporation eliminated a director's personal liability
for monetary damages to the Registrant and its shareholders arising from a
breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve
intentional misconduct or knowing and culpable violation of law, (ii) acts or
omissions that a director believes to be contrary to the best interests of the
Registrant or its shareholders or that involve the absence of good faith on
the part of the director, (iii) any transaction from which a director derived
an improper personal benefit, (iv) acts or omissions that show a reckless
disregard for the director's duty to the Registrant or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Registrant or its shareholders, (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Registrant or its shareholders, (vi) interested
transactions between the corporation and a director in which a director has a
material financial interest, and (vii) liability for improper distributions,
loans or guarantees. This provision did not eliminate the directors' duty of
care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Amended and Restated Articles of Incorporation and Bylaws in effect prior to
the reincorporation contained provisions covering indemnification to the
maximum extent permitted by the California General Corporation Law of
corporate directors, officers and other agents against certain liabilities and
expenses incurred as a result of proceedings involving such persons in their
capacities as directors, officers employees or agents, including proceedings
under the Securities Act or the Securities Exchange Act of 1934, as amended.
II-1
<PAGE>
The Registrant is subject to Section 145 of the Delaware General Corporation
Law ("Section 145"). Section 145 permits indemnification of officers and
directors of the Company under certain conditions and subject to certain
limitations. Section 145 also provides that a corporation has the power to
maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liability under the provisions of Section 145. Upon shareholder approval of
such reincorporation, Article VI, Section 6.1, of the Registrant's Bylaws will
provide for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors
and administrators of the person. In addition, expenses incurred by a director
or executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she
is or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by the Registrant as
authorized by the relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Registrant's Certificate of Incorporation provides that, pursuant to
Delaware law, its directors shall not be personally liable for monetary
damages for breach of the directors' fiduciary duty as directors to the
Registrant and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Registrant for acts or omission not in good
faith or involving international misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of Stock repurchases or redemptions that are
unlawful under Section 174 of the Delaware General Corporation Law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. Prior to the effective date of this Offering, the Registrant will enter
into indemnification agreements with each of its directors and executive
officers. Generally, the indemnification agreements attempt to provide the
maximum protection permitted by Delaware law as it may be amended from time to
time. Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Registrant (except to the extent
the court determines he or she is fairly and reasonably entitled to indemnity
for expenses), for settlements not approved by the Registrant or for
settlements and expenses if the settlement is not approved by the court. The
indemnification agreements provide for the Registrant to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. In
order to receive an advance of expenses, the individual must submit to the
Registrant copies of invoices presented to him or her for such expenses. Also,
the individual must repay such advances upon a final judicial decision that he
or she is not entitled to indemnification.
The Registrant intends to enter into additional indemnification agreements
with each of its directors and executive officers to effectuate these
indemnity provisions and to purchase directors' and officers' liability
insurance.
II-2
<PAGE>
In addition to the foregoing, the Underwriting Agreement contains certain
provisions by which the Underwriters have agreed to indemnify the Registrant,
each person, if any, who controls the Registrant within the meaning of Section
15 of the Securities Act, each director of the Registrant and each officer of
the Registrant who signs the Registration Statement, with respect to
information furnished in writing by or on behalf of the Underwriters for use
in the Registration Statement.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 31, 1994, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities
(as adjusted to reflect the two-for-one stock split effected in March 1997 and
the one-for-two reverse stock split effected in November 1997):
1. From December 31, 1994 to January 12, 1998, the Registrant issued and sold
738,288 shares of Common Stock to employees and consultants at prices
ranging from $0.01 to $2.00 per share, upon exercise of stock options,
pursuant to the Registrant's 1993 Stock Option Plan.
2. On September 30, 1997, the Registrant issued 20,602 shares of Common Stock
to employees as a stock bonus.
3. On March 21, 1996, the Registrant issued and sold 2,263,802 shares of
Series A Preferred Stock to a total of four investors for an aggregate
purchase price of $3,500,059.64.
4. On December 17, 1996, the Registrant issued and sold 1,121,934 shares of
Series B Preferred Stock to a total of five investors for an aggregate
purchase price of $4,229,679.87 and issued to one investor for no
additional consideration a warrant to purchase 50,000 shares of Series B
Preferred Stock at an exercise price of $3.77 per share plus an additional
variable amount of Preferred Stock.
The issuances of securities set forth in paragraphs 1 and 2 above were
deemed to be exempt from the registration requirements of the Securities Act
in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The sales
of securities set forth in paragraphs 3 and 4 above were deemed to be exempt
from the registration requirements of the Securities Act in reliance on
Section 4(2) thereof, or Regulation D promulgated thereunder, as transactions
by an issuer not involving a public offering. The granting of Stock options
described in paragraph 1 above and the Stock bonus described in paragraph 2
above did not require registration under the Securities Act, or an exemption
therefrom, insofar as such grants did not involve a "sale" of securities as
such term is used in Section 2(3) of the Securities Act.
The recipients of the securities in each of the transactions set forth in
paragraphs 1 through 4 above represented their intention to acquire such
securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments used in such transactions. All
recipients received adequate information about the Registrant at the time of
the acquisition of such securities or had access, through employment or other
relationships with the Registrant, to such information.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Artisan Components, Inc.,
a California corporation, and Artisan Components, Inc., a Delaware
corporation
3.1 Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Certificate of Incorporation of the Registrant
(to be filed immediately after the closing of this offering).
3.3 Bylaws of the Registrant.
3.4.1 California Amended and Restated Articles of Incorporation.
3.4.2 California Bylaws of Registrant.
4.1* Specimen Common Stock certificate of the Registrant.
4.2 First Amended and Restated Registration Rights Agreement dated
December 17, 1996 by and among the Registrant and the Shareholders
named therein.
4.3 Warrant to purchase shares of Series B Preferred Stock dated December
17, 1996 issued by the Registrant to Synopsys, Inc.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Form of Indemnification Agreement for directors and executive
officers.
10.2 1993 Stock Option Plan and form of agreement thereunder.
10.3 1997 Employee Stock Purchase Plan.
10.4 1997 Director Stock Option Plan.
10.5 Lease Agreement dated December 13, 1995 between Registrant and
Spieker Properties, L.P. for 2077 Gateway Place, San Jose, California
office.
10.5.1 Sublease dated October 10, 1997 between the Registrant and Unison
Software, Inc.
10.5.2 First Addendum to Sublease dated October 14, 1997 between the
Registrant and Unison Software, Inc.
10.5.3 Fixed Asset Purchase Agreement dated October 10, 1997 between the
Registrant and Unison Software, Inc.
10.6 Series A Preferred Stock Purchase Agreement dated March 21, 1996 by
and among the Registrant and the Purchasers named therein.
10.7+ Purchase and License Agreement dated April 9, 1996 between the
Registrant and OKI Electric Industry Co., Ltd. and amendments
thereto.
10.8 Business Loan Agreement dated May 8, 1996 between the Registrant and
Union Bank of California, N.A. and attachments thereto.
10.9 Offer Letter dated August 29, 1996 between the Registrant and Jeffrey
A. Lewis and letter amendment dated September 5, 1996 thereto.
10.10+ Collaboration Agreement dated December 4, 1996 between the Registrant
and SGS-THOMSON MICROELECTRONICS S.r.l.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.11 Series B Preferred Stock Purchase Agreement dated December 17, 1996
by and among the Registrant and the Purchasers named therein.
10.12+ OEM Agreement dated December 6, 1996 between the Registrant and
Synopsys, Inc.
10.13+ License Agreement dated June 16, 1997 between the Registrant and
Fujitsu Microelectronics, Inc.
10.14 Lease Agreement dated June 16, 1997 between Registrant, Richard
Bowling and Katherine Bowling for 1195 Bordeaux Drive, Sunnyvale,
California office.
10.15 Severance Agreement dated June 20, 1997 between the Registrant and
Robert D. Selvi.
10.16 Offer Letter dated July 31, 1997 between the Registrant and Larry J.
Fagg.
11.1 Statement regarding calculation of earnings per share.
23.1* Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (See Exhibit 5.1)
24.1 Power of Attorney for directors Templeton, Lanza and Becker.
24.1.1* Power of Attorney for Dr. Eli Harari (see page II-7).
27.1* Financial Data Schedule.
</TABLE>
- --------
Unless otherwise indicated, exhibits have previously been filed.
* Documents filed herewith.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
B. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements of the Registrant
or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
The Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(2) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement No. 333-41219
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Sunnyvale, State of California, on the 13th day of January, 1998.
Artisan Components, Inc.
/s/ Mark R. Templeton
By___________________________________
MARK R. TEMPLETON PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mark R. Templeton and Robert D. Selvi
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, with full power of each to act alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, with full power of each to act alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark R. Templeton President, Chief Executive January 13, 1998
____________________________________ Officer and Director
Mark R. Templeton (Principal Executive
Officer)
/s/ Robert D. Selvi Vice President, Finance, January 13, 1998
____________________________________ and Chief Financial
Robert D. Selvi Officer (Principal
Financial and Accounting
Officer)
/s/ Lucio L. Lanza* Chairman of the Board of January 13, 1998
____________________________________ Directors
Lucio L. Lanza
/s/ Scott T. Becker* Director January 13, 1998
____________________________________
Scott T. Becker
/s/ Dr. Eli Harari Director January 13, 1998
____________________________________
Dr. Eli Harari
*/s/ Robert D. Selvi
_____________________________________
Robert D. Selvi, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
ARTISAN COMPONENTS, INC.
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30,
1995:
Allowance for doubtful
accounts............. -- -- -- -- --
Year ended September 30,
1996:
Allowance for doubtful
accounts............. -- -- -- -- --
Year ended September 30,
1997:
Allowance for doubtful
accounts............. -- $275,000 -- -- $275,000
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the financial statements of Artisan
Components, Inc. as of September 30, 1996 and 1997, and for each of the three
years in the period ended September 30, 1997, which financial statements are
included in the Registration Statement, we have also audited the financial
statement schedule listed in Item 16.b. herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 24, 1997
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Artisan Components,
Inc., a California corporation, and Artisan Components, Inc., a
Delaware corporation
3.1 Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Certificate of Incorporation of the Registrant
(to be filed immediately after the closing of this offering).
3.3 Bylaws of the Registrant.
3.4.1 California Amended and Restated Articles of Incorporation.
3.4.2 California Bylaws of Registrant.
4.1* Specimen Common Stock certificate of the Registrant.
4.2 First Amended and Restated Registration Rights Agreement dated
December 17, 1996 by and among the Registrant and the Shareholders
named therein.
4.3 Warrant to purchase shares of Series B Preferred Stock dated
December 17, 1996 issued by the Registrant to Synopsys, Inc.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Form of Indemnification Agreement for directors and executive
officers.
10.2 1993 Stock Option Plan and form of agreement thereunder.
10.3 1997 Employee Stock Purchase Plan.
10.4 1997 Director Stock Option Plan.
10.5 Lease Agreement dated December 13, 1995 between Registrant and
Spieker Properties, L.P. for 2077 Gateway Place, San Jose,
California office.
10.5.1 Sublease dated October 10, 1997 between the Registrant and Unison
Software, Inc.
10.5.2 First Addendum to Sublease dated October 14, 1997 between the
Registrant and Unison Software, Inc.
10.5.3 Fixed Asset Purchase Agreement dated October 10, 1997 between the
Registrant and Unison Software, Inc.
10.6 Series A Preferred Stock Purchase Agreement dated March 21, 1996 by
and among the Registrant and the Purchasers named therein.
10.7+ Purchase and License Agreement dated April 9, 1996 between the
Registrant and OKI Electric Industry Co., Ltd. and amendments
thereto.
10.8 Business Loan Agreement dated May 8, 1996 between the Registrant and
Union Bank of California, N.A. and attachments thereto.
10.9 Offer Letter dated August 29, 1996 between the Registrant and
Jeffrey A. Lewis and letter amendment dated September 5, 1996
thereto.
10.10+ Collaboration Agreement dated December 4, 1996 between the
Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
</TABLE>
I
<PAGE>
<TABLE>
<C> <S>
10.11 Series B Preferred Stock Purchase Agreement dated December 17, 1996
by and among the Registrant and the Purchasers named therein.
10.12+ OEM Agreement dated December 6, 1996 between the Registrant and
Synopsys, Inc.
10.13+ License Agreement dated June 16, 1997 between the Registrant and
Fujitsu Microelectronics, Inc.
10.14 Lease Agreement dated June 16, 1997 between Registrant, Richard
Bowling and Katherine Bowling for 1195 Bordeaux Drive, Sunnyvale,
California office.
10.15 Severance Agreement dated June 20, 1997 between the Registrant and
Robert D. Selvi.
10.16 Offer Letter dated July 31, 1997 between the Registrant and Larry J.
Fagg.
11.1 Statement regarding calculation of earnings per share.
23.1* Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (See Exhibit 5.1).
24.1 Power of Attorney for directors Templeton, Lanza and Becker.
24.1.1* Power of Attorney for Dr. Eli Harari (see page II-7).
27.1* Financial Data Schedule.
</TABLE>
- --------
Unless otherwise indicated, exhibits have previously been filed.
* Documents filed herewith.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
2
<PAGE>
EXHIBIT 1.1
DATED _________, 1998
ARTISAN COMPONENTS, INC.
2,900,000 shares
Common Stock
__________________________
UNDERWRITING AGREEMENT
__________________________
<PAGE>
ARTISAN COMPONENTS, INC.
2,900,000 Shares
Plus an option to purchase up to
435,000 additional shares to cover over-allotments
Common Stock
UNDERWRITING AGREEMENT
----------------------
February __, 1998
DEUTSCHE MORGAN GRENFELL INC.
HAMBRECHT & QUIST L.L.C.
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the several Underwriters
c/o Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Dear Sirs:
Artisan Components, Inc., a Delaware corporation (the "Company"),
and the persons named in Schedule 2 hereto (the "Selling Stockholders") hereby
confirm their agreement with the several underwriters named in Schedule 1 hereto
(the "Underwriters"), for whom you have been duly authorized to act as
representatives (the firms acting in such capacities, the "Representatives"), as
set forth below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be references to the Underwriters.
Section 1. Underwriting. Subject to the terms and conditions contained
------------
herein:
(a) The Company proposes to issue and sell 2,900,000 shares of
common stock, par value $.001 per share (the "Common Stock"), of the Company
(said shares to be issued and sold by the Company, the "Firm Shares") to the
several Underwriters. The Company also proposes to issue and sell not more than
65,000 additional shares of Common Stock and the Selling Stockholders propose to
sell not more than 370,000 additional shares of Common Stock as set forth in
Schedule 2 (collectively, the "Option Shares" and, together with the Firm
Shares, the "Shares") to the several Underwriters if requested by the
Representatives as provided in Section 2(b) hereof.
(b) Upon your authorization of the release of the Firm Shares,
the Underwriters propose to make a public offering (the "Offering") of the Firm
Shares upon the terms set forth in the Prospectus (as defined below) as soon
after the Registration Statement (as defined below) and this
<PAGE>
Agreement have become effective as in the Representatives' sole judgment is
advisable. As used in this Agreement, the term "Original Registration Statement"
means the registration statement (File No. 333-41219) initially filed with the
Securities and Exchange Commission (the "Commission") relating to the Shares, as
amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Securities Act of 1933, as amended
(the "Securities Act"), and included in the Prospectus; the term "Rule 462(b)
Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Securities Act (including the
Registration Statement and any Preliminary Prospectus (as defined below) or
Prospectus incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
the Original Registration Statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Original Registration
Statement or any amendment thereto at the time it was or is declared effective);
the term "Prospectus" means:
(i) if the Company relies on Rule 434 under the Securities
Act, the Term Sheet (as defined below) relating to the
Shares that is first filed pursuant to Rule 424(b)(7) under
the Securities Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(ii) if the Company does not rely on Rule 434 under the
Securities Act, the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Securities Act;
(iii) if the Company does not rely on Rule 434 under the
Securities Act and if no prospectus is required to be filed
pursuant to Rule 424(b) under the Securities Act, the
prospectus included in the Registration Statement; or
(iv) for purposes of the representations and warranties
contained in Section 5 hereof, if the prospectus is not in
existence, the most recent Preliminary Prospectus;
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Securities Act. Any reference herein to
the "date" of a Prospectus that includes a Term Sheet shall mean the date
of such Term Sheet.
Section 2. Purchase and Closing.
--------------------
(a) On the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $___ per Share (the "Purchase Price"), the
respective number of Firm Shares set forth opposite the name of such Underwriter
in Schedule 1 hereto. Firm Shares shall be registered by BankBoston, N.A. in the
name of the nominee of the Depository Trust Company ("DTC"), Cede & Co. ("Cede &
Co."), and credited to the accounts of such of its participants as the
Representatives shall request, upon notice to the Company at least 48
2
<PAGE>
hours prior to the First Closing Date (as defined below), with any transfer
taxes payable in connection with the transfer of the Firm Shares to the
Underwriters duly paid, against payment by or on behalf of the Underwriters to
the account of the Company of the aggregate Purchase Price therefor by wire
transfer in immediately available funds. Delivery or registry of and payment for
the Firm Shares shall be made at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304 at 9:30 A.M., New
York City time, on the fourth full business day following the date of this
Agreement, or at such other place, time or date as the Representatives and the
Company may agree upon. Such time and date of delivery against payment are
herein referred to as the "First Closing Date", and the implementation of all
the actions described in this Section 2(a) is herein referred to as the "First
Closing".
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Shares as contemplated by the
Prospectus, the Company and the Selling Stockholders hereby grant to the several
Underwriters an option to purchase, severally and not jointly, the Option
Shares. The purchase price to be paid for any Option Shares shall be the same as
the Purchase Price for the Firm Shares set forth above in paragraph (a) of this
Section 2. The option granted hereby may be exercised as to all or any part of
the Option Shares from time to time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange and the Nasdaq
Stock Market's National Market (the "Nasdaq National Market") are open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Shares prior to the exercise of such option. The Representatives may
from time to time exercise the option granted hereby by giving notice in writing
or by telephone (confirmed in writing) to the Company and the Selling
Stockholders setting forth the aggregate number of Option Shares as to which the
several Underwriters are then exercising the option and the date and time for
delivery or registry of and payment for such Option Shares. Any such date of
delivery or registry shall be determined by the Representatives but shall not be
earlier than two business days or later than five business days after such
exercise of the option and, in any event, shall not be earlier than the First
Closing Date. The time and date set forth in such notice, or such other time or
date as the Representatives, the Company and the Selling Stockholders may agree
upon or as the Representatives may determine pursuant to Section 2(a) hereof, is
herein called an "Option Closing Date" with respect to such Option Shares, and
the implementation of all the actions described in this Section 2(b) is herein
referred to as the "Option Closing". As used in this Agreement, the term
"Closing Date" means either the First Closing Date or any Option Closing Date,
as applicable, and the term "Closing" means either the First Closing or any
Option Closing, as applicable. If the option is exercised as to all or any
portion of the Option Shares, then either one or more certificates in definitive
form for such Option Shares shall be delivered or, if such Option Shares are to
be held through DTC, such Option Shares shall be registered and credited, on the
related Option Closing Date in the same manner, and upon the same terms and
conditions, set forth in paragraph (a) of this Section 2, except that reference
therein to the Firm Shares and the First Closing Date shall be deemed, for
purposes of this paragraph (b), to refer to such Option Shares and Option
Closing Date, respectively. Upon exercise of the option as provided herein, the
Company and the Selling Stockholders shall become obligated to sell to each of
the several Underwriters, and, on the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, each of the Underwriters (severally and not
jointly) shall become obligated to purchase from the Company and the Selling
Stockholders, the same percentage of the total number
3
<PAGE>
of the Option Shares as to which the several Underwriters are then exercising
the option as such Underwriter is obligated to purchase of the aggregate number
of Firm Shares, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares. In the event that the option is exercised
in part, the number of Option Shares to be sold by each of the Selling
Stockholders shall be, as nearly as practicable, in the same proportion to each
other as are the number of Option Shares to be sold by each Selling Stockholder
listed opposite their names on Schedule 2 hereto.
(c) The Company and the Selling Stockholders hereby acknowledge
that the payment of monies pursuant to Section 2(a) hereof (a "Payment") by or
on behalf of the Underwriters of the aggregate Purchase Price for any Shares
does not constitute closing of a purchase and sale of the Shares. Only execution
and delivery, by facsimile or otherwise, of a receipt for Shares by the
Underwriters indicates completion of the closing of a purchase of the Shares
from the Company and the Selling Stockholders. Furthermore, in the event that
the Underwriters make a Payment to the Company and the Selling Stockholders
prior to the completion of the closing of a purchase of Shares, the Company and
the Selling Stockholders hereby acknowledge that until the Underwriters execute
and deliver such receipt for the Shares, the Company and the Selling
Stockholders will not be entitled to the Payment and shall return the Payment to
the Underwriters as soon as practicable (by wire transfer of same-day funds)
upon demand. In the event that the closing of a purchase of Shares is not
completed and the Payment is not returned by the Company and the Selling
Stockholders to the Underwriters on the same day the Payment was received by the
Company and the Selling Stockholders, the Company and the Selling Stockholders
agree to pay to the Underwriters in respect of each day the Payment is not
returned by them, in same-day funds, interest on the amount of such Payment in
an amount representing the Underwriters' cost of financing as reasonably
determined by the Representatives, pro rata in proportion to the percentage of
--- ----
such Payment received by each.
(d) It is understood that any of you, individually and not as
one of the Representatives, may (but shall not be obligated to) make Payment on
behalf of any Underwriter or Underwriters for any of the Shares to be purchased
by such Underwriter or Underwriters. No such Payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
Section 3. Covenants.
---------
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will:
(x) use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file
the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required
by Rules 434 and 424(b) under the Securities Act. During
any time when a prospectus relating to the Shares is
required to be
4
<PAGE>
delivered under the Securities Act, the Company (I) will
comply with all requirements imposed upon it by the
Securities Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Shares in
accordance with the provisions hereof and of the Prospectus,
as then amended or supplemented, and (II) will not file with
the Commission the Prospectus, Term Sheet, any amendment or
supplement to such Prospectus or Term Sheet, any amendment
to the Registration Statement (including the amendment
referred to in the second sentence of Section 5(a)(i)
hereof) or any Rule 462(b) Registration Statement unless the
Representatives previously have been advised of, and
furnished with a copy within a reasonable period of time
prior to, the proposed filing and the Representatives shall
have given their consent to such filing. The Company will
prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon
request by the Representatives or counsel for the
Underwriters, any amendments to the Registration Statement
or amendments or supplements to the Prospectus that may be
necessary or advisable in connection with the distribution
of the Shares by the several Underwriters. The Company will
advise the Representatives, promptly after receiving notice
thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or
the Prospectus or Term Sheet or any amendment or supplement
thereto has been filed and will provide evidence
satisfactory to the Representatives of each such filing or
effectiveness.
(y) without charge, provide (I) to each of the
Representatives and to counsel for the Underwriters, an
executed and a conformed copy of the Original Registration
Statement and each amendment thereto or any Rule 462(b)
Registration Statement (in each case including exhibits
thereto), (II) to each other Underwriter, a conformed copy
of the Original Registration Statement and each amendment
thereto or any Rule 462(b) Registration Statement (in each
case without exhibits thereto), and (III) so long as a
prospectus relating to the Shares is required to be
delivered under the Securities Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably
request. Without limiting the application of clause (III)
of the preceding sentence, the Company, not later than (A)
9:00 A.M., New York City time, on the second business day
following the date of determination of the public offering
price, if such determination occurred at or prior to 12:00
noon, New York City time, on such date or (B) 6:00 P.M., New
York City time, on the second business day following the
date of determination of the public offering price, if such
determination occurred after 12:00 noon, New York City time,
on such date, will
5
<PAGE>
deliver to the Underwriters, without charge, as many copies
of the Prospectus and any amendment or supplement thereto as
the Representatives may reasonably request for purposes of
confirming orders that are expected to settle on the First
Closing Date.
(z) advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (I) the issuance
by the Commission of any stop order suspending the
effectiveness of the Original Registration Statement or any
amendment thereto or any Rule 462(b) Registration Statement
or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, (II) the suspension of the qualification
of the Shares for offering or sale in any jurisdiction,
(III) the institution, threatening or contemplation of any
proceeding for any purpose identified in the preceding
clause (I) or (II), or (IV) any request made by the
Commission for amending the Original Registration Statement
or any Rule 462(b) Registration Statement, for amending or
supplementing the Prospectus or for additional information.
The Company will use all reasonable efforts to prevent the
issuance of any such stop order and, if any such stop order
is issued, to obtain the withdrawal thereof as promptly as
possible.
(ii) The Company will arrange for the qualification of the
Shares for offering and sale in each jurisdiction as the
Representatives shall reasonably designate including, but not
limited to, pursuant to applicable state securities ("Blue Sky")
laws of certain states of the United States of America or other
U.S. jurisdictions, and the Company shall maintain such
qualifications in effect for so long as may be necessary in order
to complete the placement of the Shares; provided, however, that
the Company shall not be obliged to file any general consent to
service of process or to qualify as a foreign corporation or as a
securities dealer in any jurisdiction or to subject itself to
taxation in respect of doing business in any jurisdiction in which
it is not otherwise so subject.
(iii) If, at any time prior to the final date when a prospectus
to the Shares is required to be delivered under the Securities Act,
any event occurs as a result of which the Prospectus, as then
amended or supplemented, would include any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if for any other
reason it shall be necessary at any time to amend the Registration
Statement or amend or supplement the Prospectus to comply with the
Securities Act or the rules or regulations of the Commission
thereunder or applicable law, the Company will promptly notify the
Representatives thereof and will promptly, at its own expense, but
subject to the second sentence of Section 3(a)(i)(x) hereof: (x)
prepare and file with the Commission an
6
<PAGE>
amendment to the Registration Statement or amendment or supplement
to the Prospectus which will correct such statement or omission or
effect such compliance; and (y) supply any amended Registration
Statement or amended or supplemented Prospectus to the Underwriters
in such quantities as the Underwriters may reasonably request.
(iv) The Company will make generally available to its
securityholders and to the Representatives as soon as practicable
an earnings statement that satisfies the provisions of Section
11(a) of the Securities Act, including Rule 158 thereunder.
(v) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under "Use of
Proceeds" in the Prospectus.
(vi) The Company will not publicly announce any intention to, and
will not itself, without the prior written consent of the
Representatives, on behalf of the Underwriters, (x) offer, pledge,
sell, offer to sell, contract to sell, sell any option or contract
to purchase, purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for,
Common Stock, or (y) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of
ownership of the shares of Common Stock or securities convertible
into, or exercisable or exchangeable for, shares of Common Stock
(whether any such transaction described in clause (x) or (y) above
is to be settled by delivery of shares of Common Stock or such
other securities, in cash or otherwise), for a period beginning
from the date hereof and continuing to and including the date 180
days after the date hereof, except pursuant to this Agreement and
other than with respect to (I) shares of Common Stock to be issued
upon the exercise of warrants to purchase shares of Common Stock,
or upon conversion or exchange of securities convertible or
exchangeable into shares of Common Stock, in each case, which are
outstanding on the date hereof and disclosed in the Prospectus, and
(II) shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock) issued
or issuable pursuant to any employee benefit plans, qualified stock
option plans or other employee compensation plans which are
disclosed in the Prospectus.
(vii) Neither the Company nor any of its affiliates, nor any
person acting on behalf of any of them will, directly or
indirectly, (x) take any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares or (y) (I) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Shares or (II) pay or
agree to pay to any person
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any compensation for soliciting another to purchase any other
securities of the Company.
(viii) The Company will obtain the agreements described in Section
7(h) hereof prior to the First Closing Date.
(ix) If at any time during the 25-day period after the
Registration Statement becomes effective or during the period prior
to any Closing Date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the
Representatives' sole judgment the market price of the Shares has
been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from
the Representatives advising the Company to the effect set forth
above, forthwith prepare, consult with the Representatives
concerning the substance of, and disseminate a press release or
other public statement reasonably satisfactory to the
Representatives, responding to or commenting on such rumor,
publication or event.
(x) If the Company elects to rely on Rule 462(b), the Company
shall both file the Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable
fees in accordance with Rule 111 promulgated under the Securities
Act by the earlier of (x) 10:00 P.M. New York City time on the date
of this Agreement and (y) the time confirmations are sent or given,
as specified by Rule 462(b)(2) under the Securities Act.
(xi) The Company will cause the Shares to be duly included for
quotation on the Nasdaq National Market prior to the First Closing
Date. The Company will use all reasonable efforts to ensure that
the Shares remain included for quotation on the Nasdaq National
Market following the First Closing Date.
(b) Each Selling Stockholder agrees that:
(i) It will not, and no person acting on behalf of such Selling
Stockholder will, directly or indirectly, (x) take any action
designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (y) (I) sell, bid
for, purchase, or pay anyone any compensation for soliciting
purchases of, the Shares or (II) pay or agree to pay to any person
any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Shares by the
Selling Stockholders under this Agreement) .
(ii) It will not publicly announce any intention to, and will not
itself, without the prior written consent of the Representatives on
behalf of the
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Underwriters, (x) offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, purchase any option
to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any of
the shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, Common Stock, or (y) enter into
any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock (whether any such
transaction described in clause (x) or (y) above is to be settled
by delivery of shares of Common Stock or such other securities, in
cash or otherwise), in each case, beneficially owned (within the
meaning of Rule 13d-3 under the Exchange Act) or otherwise
controlled by such person on the date hereof or hereafter acquired,
for a period beginning from the date hereof and continuing to and
including the date 180 days after the date hereof; provided,
however, that such Selling Stockholder may, without the prior
written consent of the Representatives on behalf of the
Underwriters, transfer shares of Common Stock or such other
securities to members of such Selling Stockholder's immediate
family or to trusts for the benefit of members of such Selling
Stockholder's immediate family or in connection with bona fide
gifts, provided that any transferee agrees to the transfer
restrictions described above.
Section 4. Expenses.
--------
(a) The Company shall bear and pay all costs and expenses incurred
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 9 hereof, including: (i) the fees and expenses of
its counsel, accountants and any other experts or advisors retained by the
Company; (ii) the costs of delivering and distributing the Powers of Attorney
(as defined below) and the Custody Agreements (as defined below) and the fees
and expenses of the Custodian (as defined below) (and any other Attorney-in-Fact
(as defined below)); (iii) fees and expenses incurred in connection with the
registration of the Shares under the Securities Act and the preparation and
filing of the Registration Statement, the Prospectus and all amendments and
supplements thereto; (iv) the printing and distribution of the Prospectus and
any Preliminary Prospectus and the printing and production of all other
documents connected with the Offering (including this Agreement and any other
related agreements); (v) expenses related to the qualification of the Shares
under the state securities or Blue Sky laws and the securities laws of Canada
and Japan, including filing fees and the fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of any Blue Sky memoranda; (vi) the filing fees and expenses, if any, incurred
with respect to any filing with the National Association of Securities Dealers,
Inc., including the fees and disbursements of counsel for the Underwriters in
connection therewith; (vii) all expenses arising from the quoting of the Shares
on the Nasdaq National Market; (viii) all arrangements relating to the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees; (ix) the
costs and expenses of travel, lodging and meals of the Company's employees in
connection with the "roadshow" and any other meetings with prospective investors
in
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<PAGE>
the Shares (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and one-half of the cost of
any aircraft chartered in connection with the roadshow; and (x) the costs and
expenses of advertising relating to the Offering (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). Subject to the provisions of Section 10, the Underwriters agree
to pay all costs and expenses incident to the performance of their obligations
under this Agreement not payable by the Company pursuant to the preceding
sentence, including, without limitation, the fees and disbursements of counsel
to the Underwriters (other than as set forth in clauses (v) and (vi) above).
(b) The Selling Stockholders shall bear and pay all costs and
expenses incurred incident to the performance of their respective obligations
under this Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 9 hereof,
including: (i) any stamp duties, capital duties and stock transfer taxes, if
any, payable upon the sale of the Shares of such Selling Stockholders to the
Underwriters and (ii) the fees and disbursements of their respective counsel,
accountants and other advisors.
Section 5. Representations and Warranties.
------------------------------
(a) As a condition of the obligation of the Underwriters to
underwrite and purchase the Shares, the Company and, to the best of their
knowledge after careful review of this Agreement, the Registration Statement and
the Prospectus, the Selling Stockholders represent and warrant to, and agree
with, each of the several Underwriters as follows:
Registration Statement and Prospectus
(i) The Original Registration Statement, including the
Preliminary Prospectus, has been filed by the Company with the
Commission under the Securities Act, and one or more amendments
to such Registration Statement may have been so filed. After the
execution of this Agreement, the Company will file with the
Commission either (x) if such Registration Statement, as it may
have been amended, has been declared by the Commission to be
effective under the Securities Act, either (I) if the Company
relies on Rule 434 under the Securities Act, a Term Sheet
relating to the Shares that shall identify the Preliminary
Prospectus that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the
Securities Act or (II) if the Company does not rely on Rule 434
under the Securities Act, a prospectus in the form most recently
included in an amendment to such Registration Statement (or, if
no such amendment shall have been filed, in such Registration
Statement), with such changes or insertions as are required by
Rule 430A under the Securities Act or permitted by Rule 424(b)
under the Securities Act, and in the case of either clause (I) or
(II) of this sentence, as have been provided to and approved by
the Representatives prior to the execution of this Agreement, or
(y) if such Registration Statement, as it may have been amended,
has not been declared by the Commission to be effective under the
Securities Act, an amendment to such Registration Statement,
including a form of prospectus, a copy of which amendment has
been furnished to and approved by the Representatives prior to
the execution of this Agreement. The Company may also file a Rule
462(b) Registration Statement with the Commission for the purpose
of registering certain
10
<PAGE>
additional Shares, which registration shall be effective upon
filing with the Commission.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any
Preliminary Prospectus was filed with the Commission, it (x)
contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Securities Act and the rules and regulations
of the Commission thereunder and (y) did not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was or
is declared effective, it (I) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the
requirements of, the Securities Act and the rules and regulations
of the Commission thereunder and (II) did not or will not contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading. When the Prospectus or any
Term Sheet that is a part thereof or any amendment or supplement
to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or such amendment or supplement is
not required to be so filed, when the Registration Statement or
the amendment thereto containing the Prospectus or such amendment
or supplement to the Prospectus was or is declared effective) and
on the Closing Date, the Prospectus, as amended or supplemented
at any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of,
the Securities Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (ii) do
not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and
the Rule 462(b) Registration Statement is not effective, (x) the
Company will file a Rule 462(b) Registration Statement in
compliance with, and that is effective upon filing pursuant to,
Rule 462(b) and (y) the Company has given irrevocable
instructions for transmission of the applicable filing fee in
connection with the filing of the Rule 462(b) Registration
Statement, in compliance with Rule 111 under the Securities Act,
or the Commission has received payment of such filing fee.
(iv) If the Company has elected to rely on Rule 434 under
the Securities Act, the Prospectus is not "materially different",
as such term is used in Rule 434,
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<PAGE>
from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective
amendment thereto (including such information that is permitted
to be omitted pursuant to Rule 430A under the Securities Act).
(v) The Company has not distributed and, prior to the
later of (x) any Closing Date and (y) the completion of the
distribution of the Shares, will not distribute any offering
material in connection with the Offering other than the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement
thereto.
(vi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (x) the Company has not incurred any material
liability or obligation, direct or contingent, nor entered into
any material transaction not in the ordinary course of business;
(y) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock; and (z) there has
not been any material change in the capital stock, short-term or
long-term debt of the Company, except in each case as described
in or contemplated by the Prospectus.
The Shares
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus, and the Company
has no subsidiaries. All of the issued shares of capital stock of
the Company have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase such securities. The
Shares have been duly authorized by all necessary corporate
action of the Company and, after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable at
the Closing Date. No holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or
other rights to subscribe for any of the Shares, and no holder of
securities of the Company has any right which has not been fully
exercised or waived to require the Company to register the offer
or sale of any securities owned by such holder under the
Securities Act in the Offering contemplated by this Agreement.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (x) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the
Company, (y) warrants, rights or options to subscribe for or
purchase from the Company any such capital stock or any such
convertible or exchangeable securities or obligations, or (z)
obligations of the Company to issue any shares of capital stock,
any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options.
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<PAGE>
(ix) The Company does not own any shares of stock or any
other equity securities of any corporation or have any equity
interest in any firm, partnership, association or other entity,
except as described in or contemplated by the Prospectus.
Listing
(x) All of the Shares have been duly authorized and
accepted for quotation on the Nasdaq National Market, subject to
official notice of issuance.
Market manipulation
(xi) Neither the Company nor any of its affiliates, nor
any person acting on behalf of any of them has, directly or
indirectly, (x) taken any action designed to cause or to result
in, or that has constituted or which might reasonably be expected
to constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of
the Shares, or (y) since the filing of the Original Registration
Statement (I) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Shares or (II) paid
or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
Corporate power and authority
(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the law of its
jurisdiction of incorporation with full power and authority to
own, lease and operate its properties and assets and conduct its
business as described in the Prospectus, is duly qualified to
transact business and is in good standing in each jurisdiction in
which its ownership, leasing or operation of its properties or
assets or the conduct of its business requires such
qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company,
and has full power and authority to execute and perform its
obligations under this Agreement.
(xiii) The execution and delivery of this Agreement and the
issuance and sale of the Shares have been duly authorized by all
necessary corporate action of the Company, and this Agreement has
been duly executed and delivered by the Company and is the valid
and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as its
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally.
(xiv) The issuance, offering and sale of the Shares to the
Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this
Agreement and the consummation of the other transactions herein
contemplated do not (x) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except (I) if the Company has elected to
rely on Rule 462(b) and the Rule 462(b) Registration Statement is
not effective, the registration of certain Shares pursuant to the
Rule 462(b) Registration
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<PAGE>
Statement that will be effective upon filing in compliance with
Rule 462(b) and (II) such as have been obtained or made or such
as may be required by the state securities or Blue Sky laws of
the various states of the United States of America or other U.S.
jurisdictions or by the National Association of Securities
Dealers, Inc. ("NASD") in connection with the offer and sale of
the Shares by the Underwriters, or (y) conflict with or result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any material indenture, mortgage,
deed of trust, lease or other agreement or instrument to which
the Company is a party or by which the Company or any of its
properties is bound, or the charter documents or by-laws of the
Company, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator applicable to the Company.
(xv) The Company is not, and will conduct its operations
in a manner so that it continues not to be, an "investment
company" and, after giving effect to the Offering and the
application of the proceeds therefrom, will not be an "investment
company", as such term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act").
Title, licenses and consents
(xvi) The Company has good and marketable title in fee
simple to all items of real property and marketable title to all
personal property owned by it, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely
affect the value of such property and do not interfere with the
use made or proposed to be made of such property by the Company,
and any real property and buildings held under lease by the
Company are held under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and
buildings by the Company, in each case except as described in or
contemplated by the Prospectus.
(xvii) The Company owns or possesses, or can acquire on
reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, know-how,
copyrights, trade secrets and proprietary or other confidential
information necessary to operate its business as described in the
Prospectus, and the Company has not received any notice of
infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling
or finding, would have a materially adverse effect on or
constitute a materially adverse change in, or constitute a
development involving a prospective materially adverse effect on
or change in, the condition (financial or otherwise), earnings,
properties, business affairs or business prospects, stockholders'
equity, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus.
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(xviii) The Company possesses all consents, licenses,
certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities
necessary to conduct its business as described in the Prospectus,
and the Company has not received any notice of proceedings
relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a materially adverse effect on or constitute
a materially adverse change in, or constitute a development
involving a prospective materially adverse effect on or change
in, the condition (financial or otherwise), earnings, properties,
business affairs or business prospects, net worth or results of
operations of the Company, except as described in or contemplated
by the Prospectus.
Financial statements
(xix) Coopers & Lybrand L.L.P., who have certified certain
financial statements of the Company and delivered their report
with respect to the audited financial statements and schedule
included in the Registration Statement and the Prospectus, are
independent public accountants as required by the Securities Act
and the applicable rules and regulations thereunder.
(xx) The financial statements and schedule of the Company
included in the Registration Statement and the Prospectus were
prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods
involved (except as otherwise noted therein) and they present
fairly the financial condition of the Company as at the dates at
which they were prepared and the results of operations of the
Company in respect of the periods for which they were prepared.
Internal Accounting Controls
(xxi) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (w)
transactions are executed in accordance with management's general
or specific authorizations; (x) transactions are recorded as
necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability; (y)
access to assets is permitted only in accordance with
management's general or specific authorization; and (z) the
recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Litigation
(xxii) No legal or governmental proceedings are pending or
threatened to which the Company is a party or to which the
property of the Company is subject that are required to be
described in the Registration Statement or the Prospectus and are
not described therein; and no statutes, regulations, contracts or
other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
therein or filed as required.
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Dividends and Distributions
(xxiii) The Company is not currently prohibited, directly or
indirectly, from paying any dividends or making any other distribution
on its capital stock, in each case except as described in or
contemplated by the Prospectus.
Taxes
(xxiv) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions of the time for filing thereof (except in any case in which
the failure so to file would not have a materially adverse effect on
the Company) and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as described in or contemplated by the Prospectus.
Insurance
(xxv) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such
amounts as are prudent and customary in its business as described in
the Prospectus; the Company has not been refused any insurance
coverage sought or applied for; and the Company has no reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition (financial or otherwise), earnings, properties, business
affairs or business prospects, net worth or results of operations of
the Company, except as described in or contemplated by the Prospectus.
Pension and Labor
(xxvi) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (x) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (y) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
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(xxvii) No labor dispute with the employees of the Company
exists or is threatened or imminent that could have a materially
adverse effect on or constitute a materially adverse change in, or
constitute a development involving a prospective materially adverse
effect on or change in, the condition (financial or otherwise),
properties, management, earnings, business affairs or business
prospects, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus.
Environmental
(xxviii) The Company is not in violation of any federal or state
law or regulation relating to occupational safety and health or to the
storage, handling or transportation of hazardous or toxic materials
and the Company has received all permits, licenses or other approvals
required of it under applicable federal and state occupational safety
and health and environmental laws and regulations to conduct its
business as described in the Prospectus, and the Company is in
compliance with all terms and conditions of any such permit, license
or approval, except any such violation of law or regulation, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, have a
materially adverse effect on or constitute a materially adverse change
in, or constitute a development involving a prospective materially
adverse effect on or change in, the condition (financial or
otherwise), earnings, properties, business affairs or business
prospects, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus.
Other Agreements
(xxix) No default by the Company, or to the Company's knowledge,
by another party, exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default by the Company,
or to the Company's knowledge, by another party, in the due
performance and observance of any term, covenant or condition of any
material indenture, mortgage, deed of trust, lease or other material
agreement or instrument to which the Company is a party or by which
the Company or any of its properties is bound.
Absence of Materially Adverse Change
(xxx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
the Company has not sustained any material loss or interference with
its business as described in the Prospectus or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has been no materially adverse change
(including, without limitation, a change in management or control), or
development involving a prospective materially adverse change, in the
condition (financial or otherwise), management, earnings, property,
business affairs or business prospects, stockholders' equity, net
worth or results of operations of the Company, other than as described
in or contemplated by the Prospectus (exclusive of any amendments or
supplements thereto).
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(xxxi) No receiver or liquidator (or similar person) has been
appointed in respect of the Company or in respect of any part of the
assets of the Company; no resolution, order of any court, regulatory
body, governmental body or otherwise, or petition or application for
an order, has been passed, made or presented for the winding up of the
Company or for the protection of the Company from its creditors; and
the Company has not stopped or suspended payments of its debts, become
unable to pay its debts or otherwise become insolvent.
(b) As a further condition of the obligation of the Underwriters to
underwrite and pay for the Shares, each Selling Stockholder, severally and not
jointly, represents and warrants to, and agrees with, each of the several
Underwriters that:
(i) Such Selling Stockholder has full power to enter into this
Agreement and to sell, assign, transfer and deliver to the
Underwriters the Shares to be sold by such Selling Stockholder
hereunder in accordance with the terms of this Agreement; and this
Agreement has been duly executed and delivered by such Selling
Stockholder.
(ii) Such Selling Stockholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Stockholder, the "Power-of-Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the
Representatives, appointing Mark R. Templeton and Robert D. Selvi as
such Selling Stockholder's attorneys-in-fact (the "Attorney-in-Fact")
with authority to execute, deliver and perform this Agreement on
behalf of such Selling Stockholder and appointing First National Bank
of Boston, as custodian thereunder (the "Custodian"). Certificates in
negotiable form, endorsed in blank or accompanied by blank stock
powers duly executed, with signatures appropriately guaranteed,
representing the Shares to be sold by such Selling Stockholder
hereunder have been deposited with the Custodian pursuant to the
Custody Agreement for the purpose of delivery pursuant to this
Agreement. Such Selling Stockholder has full power to enter into the
Custody Agreement and the Power-of-Attorney and to perform its
obligations under the Custody Agreement. The Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by such
Selling Stockholder and, assuming due authorization, execution and
delivery by the Custodian, are the legal, valid, binding and
enforceable instruments of such Selling Stockholder. Such Selling
Stockholder agrees that each of the Shares represented by the
certificates on deposit with the Custodian is subject to the interests
of the Underwriters hereunder, that the arrangements made for such
custody, the appointment of the Attorney-in-Fact and the right, power
and authority of the Attorney-in-Fact to execute and deliver this
Agreement, to agree on the price at which the Shares (including such
Selling Stockholder's Shares) are to be sold to the Underwriters, and
to carry out the terms of this Agreement, are to that extent
irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this
Agreement or the Custody Agreement, by any act of such Selling
Stockholder, by operation of law or otherwise, whether in the case of
any individual Selling Stockholder by the death or incapacity of such
Selling
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Stockholder, in the case of a trust or estate by the death of the
trustee or trustees or the executor or executors or the termination of
such trust or estate, or in the case of a corporate or partnership
Selling Stockholder by its liquidation or dissolution or by the
occurrence of any other event. If any individual Selling Stockholder,
trustee or executor should die or become incapacitated or any such
trust should be terminated, or if any corporate or partnership Selling
Stockholder shall liquidate or dissolve, or if any other event should
occur, before the delivery of such Shares hereunder, the certificates
for such Shares deposited with the Custodian shall be delivered by the
Custodian in accordance with the respective terms and conditions of
this Agreement as if such death, incapacity, termination, liquidation
or dissolution or other event had not occurred, regardless of whether
or not the Custodian or the Attorney-in-Fact shall have received
notice thereof.
(iii) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder hereunder and upon sale and
delivery of, and payment for, such Shares, as provided herein, such
Selling Stockholder will convey good and marketable title to such
Shares, free and clear of any security interests, liens, encumbrances,
equities, claims or other defects.
(iv) Neither such Selling Stockholder nor any person acting on
behalf of it has, directly or indirectly, (x) taken any action
designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares or (y) since the filing of the
Original Registration Statement (I) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the Shares or
(II) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company
(except for the sale of Shares by the Selling Stockholders under this
Agreement).
(v) Such Selling Stockholder has carefully reviewed this
Agreement, the Prospectus and the Registration Statement, and the
information regarding such Selling Stockholder set forth therein under
the caption "Principal Stockholders" is complete and accurate. All
information furnished by or on behalf of such Selling Stockholder for
use in the Registration Statement is, and on each Closing Date will
be, true, correct, and complete, and does not, and on such Closing
Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not
misleading, and all information furnished in writing by or on behalf
of such Selling Stockholder for use in the Prospectus is, and on such
Closing Date will be, true, correct, and complete, and does not, and
on such Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make
such information not misleading in the light of the circumstances
under which they were made.
(vi) The sale by such Selling Stockholder of Shares pursuant
hereto is not prompted by any adverse information concerning the
Company that is not set forth in the Registration Statement or the
Prospectus.
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(vii) The sale of the Shares to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained or made or such as may be required
by state securities or Blue Sky laws of the various states of the
United States of America or such other U.S. jurisdictions or by the
NASD and, if the Registration Statement is not effective under the
Securities Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under
the Securities Act, or (ii) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which such Selling Stockholder is a party
or by which such Selling Stockholder or any of such Selling
Stockholder's properties are bound, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to such Selling Stockholder.
(viii) Such Selling Shareholder has not distributed and, prior to
the later of (x) any Closing Date and (y) the completion of the
distribution of the Shares, will not distribute any offering material
in connection with the offering other than the Registration Statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto.
(c) The above representations and warranties shall be deemed to be
repeated at each Closing, and all references therein to the Shares and the
Closing Date shall be deemed to refer to the Firm Shares or the Option Shares
and the First Closing Date or the applicable Option Closing Date, each as
applicable.
Section 6. Indemnity.
---------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), against any and all
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 5 hereof,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or
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(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement
thereto a material fact required to be stated therein or
necessary to make the statements therein not misleading,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other costs or expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein; and provided, further,
that the Company will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement, alleged untrue
statement, omission or alleged omission made in any Preliminary Prospectus that
is corrected in the Prospectus or any amendment or supplement thereto if the
person asserting any such loss, claim, damage or liability purchased Shares from
such Underwriter but was not sent or given a copy of the Prospectus, as amended
or supplemented, in any case where such delivery of the Prospectus, as amended
or supplemented, was required by the Securities Act, unless such failure to
deliver the Prospectus, as amended or supplemented, was a result of
noncompliance by the Company with Section 3 hereof. The indemnity provided for
in this Section 6 shall be in addition to any liability which the Company may
otherwise have. The Company will not, without the prior written consent of the
Representatives, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Representatives
or any person who controls any such Representatives is a party to such claim,
action, suit or proceeding), unless such settlement, compromise or consent
includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
(b) Each of the Selling Stockholders severally and not jointly agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, against any and all losses, claims, damages
or liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement made by
such Selling Stockholder in Section 5 hereof,
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<PAGE>
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other costs or expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that such
Selling Stockholder will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein. Notwithstanding any
other provision of this paragraph (b), no Selling Stockholder shall be liable
for indemnification hereunder in an aggregate amount exceeding the net proceeds
(before deducting expenses) received by such Selling Stockholder in respect of
the Shares sold by such Selling Stockholder to the Underwriters pursuant to this
Agreement. The indemnity provided for in this Section 6 shall be in addition to
any liability which the Selling Stockholders may otherwise have. The Selling
Stockholders will not, without the prior written consent of the Representatives,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any such Representatives or any person
who controls any such Representatives is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, each Selling Stockholder and each person, if
any, who controls the Company or such Selling Stockholder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company or any such director
or officer of the Company, such Selling Stockholder or any such controlling
person of the Company or such Selling Stockholder may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto or (ii) the
omission or the alleged omission to state in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto a material fact required to be stated therein or necessary
to make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses
22
<PAGE>
reasonably incurred by the Company or any such director, officer or controlling
person or such Selling Stockholder or controlling person of such Selling
Stockholder in connection with investigating, defending against or appearing as
a third-party witness in connection with any such loss, claim, damage, liability
or any action in respect thereof. The indemnity provided in this Section 6 will
be in addition to any liability which any Underwriter may otherwise have. The
Underwriters will not, without the prior written consent of the Company, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not the Company or any person who controls
the Company is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of all of
the Company and such controlling persons from all liability arising out of such
claim, action, suit or proceeding. The remedies provided for in this Section 6
are not exclusive and shall not limit any rights or remedies which may otherwise
be available to any indemnified party at law or in equity.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a), (b) or (c) of this Section 6, such person (for
purposes of this paragraph (d), the "indemnified party") shall, promptly after
receipt by such party of notice of the commencement of such action, notify the
person against whom such indemnity may be sought (for purposes of this paragraph
(d), the "indemnifying party"), but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 6. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense of any such action and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 6 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated in writing by the Representatives in
the case of paragraph (a) or (b) of this Section 6, representing the indemnified
parties under such paragraph (a) or (b) who are parties to such action or
actions), or (ii) the indemnifying party does not promptly retain counsel
satisfactory to the indemnified party, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. All fees and expenses reimbursed pursuant to this
paragraph (d) shall be reimbursed as they are incurred. After such notice from
the indemnifying party to such indemnified party, the indemnifying party will
not be liable for the costs and expenses of any settlement of such action
effected by such indemnified party without the consent of the indemnifying
party.
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<PAGE>
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 6 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the Offering or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the Offering (before deducting expenses)
received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters, the
parties' relative intents, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company, the Selling
Stockholders and the Underwriters agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (e). Notwithstanding any
other provision of this paragraph (e), no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the total public offering
price of the Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute hereunder are several in proportion to their
respective underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Deutsche Morgan Grenfell
Inc. Master Agreement Among Underwriters. For purposes of this paragraph (e),
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the Registration Statement and each
person, if any, who controls the Company or any Selling Stockholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
shall have the same rights to contribution as the Company or such Selling
Stockholder, as the case may be.
Section 7. Conditions Precedent. The obligations of the several Underwriters
--------------------
to purchase and pay for the Shares shall be subject, in the Representatives'
sole discretion, to the accuracy of the representations and warranties of the
Company and the Selling Stockholders contained herein as of
24
<PAGE>
the date hereof and as of each Closing Date, as if made on and as of each
Closing Date, to the accuracy of the statements of the Company's officers and
the Selling Stockholders made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
covenants and agreements hereunder and to the following additional conditions:
(a) (i) If the Original Registration Statement or any amendment
thereto filed prior to the First Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment shall have been declared effective not later than 6:00 P.M. New York
City time on the date of determination of the public offering price, if such
determination occurred at or prior to 4:30 P.M. New York City time on such date,
or 12:00 Noon New York City time on the business day following the day on which
the public offering price was determined, if such determination occurred after
4:30 P.M. New York City time on such date, and (ii) if the Company has elected
to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been
declared effective not later than the time confirmations are sent or given as
specified by Rule 462(b)(2), or such later time and date as shall have been
consented to by the Representatives; if required, the Prospectus or any Term
Sheet that constitutes a part thereof and any amendment or supplement thereto
shall have been filed with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Securities Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received a legal opinion from
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Registration Statement is effective under the
Securities Act; any required filing of the Prospectus, or any
Term Sheet that constitutes a part thereof, pursuant to Rules 434
and 424(b) has been made in the manner and within the time period
required by Rules 434 and 424(b); and no stop order suspending
the effectiveness of the Registration Statement or any amendment
thereto has been issued and, to the best knowledge of such
counsel, no proceedings for that purpose are pending or
threatened by the Commission;
(ii) the Original Registration Statement and each amendment
thereto, any Rule 462(b) Registration Statement and the
Prospectus (in each case, other than the financial statements,
including the notes thereto, schedule and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Securities Act and the
rules and regulations of the Commission thereunder;
(iii) such counsel has no reason to believe that (in each case,
other than the financial statements, including the notes thereto,
schedule and other
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<PAGE>
financial information contained therein, as to which such counsel
need express no opinion) (x) the Registration Statement, as of
its effective date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading or (y) the Prospectus, as of its date or the date of
such opinion, included or includes any untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(iv) if the Company elects to rely on Rule 434 under the
Securities Act, the Prospectus is not "materially different", as
such term is used in Rule 434, from the prospectus included in
the Registration Statement at the time of its effectiveness or an
effective post-effective amendment thereto (including such
information that is permitted to be omitted pursuant to Rule 430A
under the Securities Act);
(v) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus as of the dates
stated therein; all of the issued shares of capital stock of the
Company have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Shares
have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued,
fully paid and nonassessable; no holders of outstanding shares of
capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Shares;
and no holder of securities of the Company has any right which
has not been fully exercised or waived to require the Company to
register the offer or sale of any securities owned by such holder
under the Securities Act in the Offering contemplated by this
Agreement;
(vi) all of the Shares have been duly authorized and accepted
for quotation on the Nasdaq National Market, subject to official
notice of issuance;
(vii) the Company has been duly organized and is validly existing
as a corporation in good standing under the laws of its
jurisdiction of incorporation and is duly qualified to transact
business as a foreign corporation and is in good standing under
the laws of all other jurisdictions where the ownership, leasing
or operation of its properties or assets or the conduct of its
business requires such qualification, except where the failure to
be so qualified does not amount to a material liability or
disability to the Company; the Company has full power and
authority to own, lease and operate its properties and assets and
conduct its business as described in the
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Registration Statement and the Prospectus, and the Company has
corporate power to enter into this Agreement and to carry out all
the terms and provisions hereof to be carried out by it;
(viii) the statements set forth under the heading "Description
of Capital Stock" in the Prospectus, insofar as such statements
purport to summarize certain provisions of the capital stock of
the Company, provide a fair summary of such provisions; and the
statements set forth under the headings "Risk Factors--Dependence
on Key Personnel," "--Certain Anti-Takeover Provisions," and
"--Shares Eligible for Future Sale," "Management--Limitation on
Liability and Indemnification Matters," "--Stock Plans," "--
401(k) Plan," and "-- Employment Agreements and Change in Control
Arrangements," "Certain Transactions," "Principal Stockholders,"
and "Shares Eligible for Future Sale" in the Prospectus, insofar
as such statements constitute a summary of the legal matters,
documents or proceedings referred to therein, have been reviewed
by such counsel and fairly present the information called for
with respect to such legal matters, documents and proceedings in
all material respects as required by the Securities Act and the
rules and regulations thereunder;
(ix) the execution and delivery of this Agreement have been
duly authorized by all necessary corporate action of the Company
and this Agreement has been duly executed and delivered by the
Company;
(x) the issuance, offering and sale of the Shares to the
Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this
Agreement and the consummation of the other transactions herein
contemplated do not (x) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained or made
(and specified in such opinion) or such as may be required by the
securities or Blue Sky laws of the various states of the United
States of America and other U.S. jurisdictions in connection with
the offer and sale of the Shares by the Underwriters, or (y)
conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under (I) any
indenture, mortgage, deed of trust, lease or other agreement or
instrument, known to such counsel, to which the Company is a
party or by which the Company or any of its properties is bound,
and which is either required to be filed as an exhibit to the
Registration Statement or is an agreement with a customer of the
Company identified in the Prospectus, or (II) the charter
documents or by-laws of the Company, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel
and applicable to the Company;
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<PAGE>
(xi) the Company is not an "investment company" and, after
giving effect to the Offering and the application of the proceeds
therefrom, will not be an "investment company", as such term is
defined in the 1940 Act; and
(xii) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company is a party
or to which the property of the Company is subject that are
required to be described in the Registration Statement or the
Prospectus and are not described therein or any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not
described therein or filed as required.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the States of Delaware and
California or the United States, to the extent satisfactory in form and scope to
counsel for the Underwriters, upon the opinion of local counsel. The foregoing
opinion shall also state that the Underwriters are justified in relying upon
such opinion of such local counsel, and copies of such opinion shall be
delivered to the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion. The opinions of issuer's counsel described herein shall be
rendered to the Underwriters at the request of the Company and shall so state
therein.
(c) The Representatives shall have received a legal opinion from
Wilson Sonsini Goodrich & Rosati, Professional Corporations, counsel for the
Selling Stockholders, dated the Closing Date, to the effect that:
(i) such Selling Stockholder has full power to enter into this
Agreement, the Custody Agreement and the Power-of-Attorney and to
sell, assign, transfer and deliver the Shares being sold by such
Selling Stockholder hereunder in the manner provided in this
Agreement and to perform its obligations under the Custody
Agreement; this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by each
Selling Stockholder; assuming due authorization, execution and
delivery by the Custodian, the Custody Agreement and the
Power-of-Attorney are the legal, valid, binding and enforceable
instruments of such Selling Stockholder, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought
in a proceeding in equity or at law);
(ii) the delivery by each Selling Stockholder to the several
Underwriters of certificates for the Shares being sold hereunder
by such Selling Stockholder against payment therefor as provided
herein, will convey good
28
<PAGE>
and marketable title to such Shares to the several Underwriters,
free and clear of all security interests, liens, encumbrances,
equities, claims or other defects;
(iii) the sale of the Shares to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such
Selling Stockholder with the other provisions of this Agreement
and the Custody Agreement and the consummation of the other
transactions herein contemplated do not (x) require the consent,
approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained and
such as may be required under state securities or Blue Sky laws,
or (y) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which, to the best of such counsel's knowledge,
such Selling Stockholder is a party or by which such Selling
Stockholder or any of such Selling Stockholder's properties are
bound, or any statute, rule or regulation or, to the best of such
counsel's knowledge, any judgment, decree, order of any court or
other governmental authority or any arbitrator applicable to such
Selling Stockholder.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of the Selling
Stockholders and public officials and, as to matters involving the application
of laws of any jurisdiction other than the State of California or the United
States, to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of local counsel. The foregoing opinion shall
also state that the Underwriters are justified in relying upon such opinion of
such local counsel, and copies of such opinion shall be delivered to the
Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
(d) The Representatives shall have received a legal opinion from
Fenwick & West LLP, counsel for the Underwriters, dated the Closing Date,
covering the issuance and sale of the Shares, the Registration Statement and the
Prospectus, and such other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(e) The Representatives shall have received from Coopers & Lybrand
L.L.P. a letter or letters dated, respectively, the date hereof and the Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the
Company within the meaning of the Securities Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited financial statements and
schedule examined by them and included in the Registration
Statement and the Prospectus comply in form in all material
respects with the applicable
29
<PAGE>
accounting requirements of the Securities Act and the related
published rules and regulations;
(iii) on the basis of a reading of the latest available interim
unaudited financial statements of the Company, carrying out
certain specified procedures (which do not constitute an
examination made in accordance with generally accepted auditing
standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this
paragraph (iii), a reading of the minute books of the
stockholders, the board of directors and any committees thereof
of the Company, and inquiries of certain officials of the Company
who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that:
(x) the unaudited financial statements of the Company
included in the Registration Statement and the Prospectus
do not comply in form in all material respects with the
applicable accounting requirements of the Securities Act
and the related published rules and regulations thereunder
or are not in conformity with GAAP applied on a basis
substantially consistent with that of the audited
financial statements included in the Registration
Statement and the Prospectus;
(y) at a specific date not more than five business
days prior to the date of such letter, there were any
changes in the capital stock or long-term debt of the
Company or any decreases in net current assets or
stockholders' equity of the Company, in each case compared
with amounts shown on the December 31, 1997 balance sheet
included in the Registration Statement and the Prospectus,
or for the period from January 1, 1998 to such specified
date there were any decreases, as compared with a period
of comparable length commencing on October 1, 1997, in
revenue, net income before provision for income taxes or
total or per share amounts of net income of the Company,
except in all instances for changes, decreases or
increases set forth in such letter.
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the
general accounting records of the Company and are included in the
Registration Statement and the Prospectus under the captions
"Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Capitalization," "Dilution," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," "Management," "Certain
Transactions," "Principal Stockholders," "Description of Capital
Stock," "Shares Eligible for Future Sales" and "Item 15. Recent
Sales of Unregistered Securities" and in Exhibit 11.01 to the
Registration Statement, and have compared such amounts,
percentages and
30
<PAGE>
financial information with such records of the Company and with
information derived from such records and have found them to be
in agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (I) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (II) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the Registration Statement, as amended as of the date
hereof. References to the Registration Statement and the Prospectus in this
paragraph (e) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(f) The Company shall have furnished or caused to be furnished to the
Underwriters at the Closing a certificate of its President and Chief Executive
Officer and its Vice President, Finance and Chief Financial Officer satisfactory
to the Underwriters to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the
Closing Date; the Registration Statement, as amended as of the
Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended
or supplemented as of the Closing Date, does not include any
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued,
and no proceedings for that purpose have been instituted or
threatened or, to the best of the Company's knowledge, are
contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with
its business as described in the Prospectus or properties from
fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal
or governmental proceeding, and there has not been any materially
adverse change (including, without limitation, a change in
management or control), or development involving a prospective
materially adverse change, in the condition (financial or
otherwise), management, earnings, properties, business affairs or
business prospects, stockholders' equity, net worth or results of
operations of the
31
<PAGE>
Company, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement
thereto).
(g) The Representatives shall have received from each Selling
Stockholder a certificate, signed by such Selling Stockholder, dated the Closing
Date, to the effect that:
(i) the representations and warranties of such Selling
Stockholder in this Agreement are true and correct as if made on
and as of the Closing Date;
(ii) the Registration Statement, as amended as of the Closing
Date, does not include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or
supplemented as of the Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
and
(iii) such Selling Stockholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior
to the Closing Date.
(h) The Representatives shall have received from each stockholder and
optionholder an agreement dated on or before the date of this Agreement to the
effect that such person will not publicly announce any intention to and will
not, without the prior written consent of the Representatives on behalf of the
Underwriters, (i) offer, pledge, sell, offer to sell, contract to sell, sell any
option or contract to purchase, purchase any option to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock
(whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of shares of Common Stock or such other securities, in cash
or otherwise), in each case, beneficially owned (within the meaning of Rule 13d-
3 under the Exchange Act) or otherwise controlled by such person on the date
hereof or hereafter acquired, for a period beginning from the date hereof and
continuing to and including the date 180 days after the date hereof; provided,
however, that such person may, without the prior written consent of the
Representatives on behalf of the Underwriters, transfer shares of Common Stock
or such other securities to members of such person's immediate family or to
trusts for the benefit of members of such person's immediate family or in
connection with bona fide gifts, provided that any transferee agrees to the
transfer restrictions described above.
(i) Prior to the commencement of the Offering, the Company shall have
made an application for the quotation of the Shares on the Nasdaq National
Market and the Shares shall have been included for trading on the Nasdaq
National Market, subject to official notice of issuance.
(j) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any downgrading, nor
shall any notice have been given
<PAGE>
of any intended or potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally recognized
statistical rating organization", as such term is defined for purposes of Rule
436(g)(2) under the Securities Act.
(k) On or before the Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company and the
Selling Stockholders.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
satisfactory in all material respects to the Representatives and counsel for the
Underwriters. The Company and the Selling Stockholders shall furnish to the
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Shares shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Shares, except that all references therein
to the Shares and the Closing Date shall be deemed to refer to the Firm Shares
or the Option Shares and the First Closing Date or the related Option Closing
Date, each as applicable.
Section 8. Default of Underwriters. If, at any Closing, any one or more of the
-----------------------
Underwriters shall fail or refuse to purchase Shares that it has or they have
agreed to purchase hereunder on such date, and the aggregate number of Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is ten percent or less of the aggregate number of the Shares to be
purchased on such date, the other Underwriters may make arrangements
satisfactory to the Representatives for the purchase of such Shares by other
persons (who may include one or more of the non-defaulting Underwriters,
including the Representatives), but if no such arrangements are made by the
First Closing Date or the related Option Closing Date, as the case may be, the
other Underwriters shall be obligated severally in the proportions that the
number of Firm Shares set forth opposite their respective names in Schedule 1
hereto bears to the aggregate number of Firm Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as the
Representatives may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, at the First Closing, any Underwriter or Underwriters shall fail or
refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than ten per cent of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to the
Representatives, the Company and the Selling Stockholders for the purchase of
such Firm Shares are not made within 36 hours after such default, this Agreement
shall terminate without liability on the part of any non-defaulting Underwriter,
the Company or any Selling Stockholder. In any such case either the
Representatives or the Company shall have the right to postpone the Closing, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. If, at any Option Closing, any
Underwriter or Underwriters shall fail or refuse to purchase Option Shares, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase
33
<PAGE>
Option Shares or (ii) purchase not less than the number of Option Shares that
such non-defaulting Underwriters would have been obligated to purchase in the
absence of such default. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 8. Any
action taken under this Section 8 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
Section 9. Termination. This Agreement shall be subject to termination in the
-----------
sole discretion of the Representatives by notice to the Company and the Selling
Stockholders given prior to any Closing Date in the event that the Company or
any Selling Stockholder shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to any Closing Date, (a)
trading in securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or materially limited or minimum or
maximum prices shall have been established by or on, as the case may be, the
Commission or the New York Stock Exchange or the Nasdaq National Market; (b)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market; (c) a general moratorium on
commercial banking activities shall have been declared by Federal, New York
State or California authorities; (d) there shall have occurred (i) an outbreak
or escalation of hostilities between the United States and any foreign power,
(ii) an outbreak or escalation of any other insurrection or armed conflict
involving the United States, or (iii) any other calamity or crisis or materially
adverse change in general economic, political or financial conditions having an
effect on the U.S. financial markets that, in the sole judgment of the
Representatives, makes it impractical or inadvisable to proceed with the public
offering or the delivery of the Shares as contemplated by the Registration
Statement, as amended as of the date hereof; or (e) the Company shall have, in
the sole judgment of the Representatives, sustained any material loss or
interference with its business as described in the Prospectus or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding, or
there shall have been any materially adverse change (including, without
limitation, a change in management or control), or constitute a development
involving a prospective materially adverse change, in the condition (financial
or otherwise), management, earnings, properties, business affairs or business
prospects, stockholders' equity, net worth or results of operations of the
Company, except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto). Termination of this
Agreement pursuant to this Section 9 shall be without liability of any party to
any other party except for the liability of the Company in relation to expenses
as provided in Sections 4 and 10 hereof, the liability of the Selling
Stockholders in relation to expenses as provided in Sections 4 and 10 hereof,
the indemnity provided in Section 6 hereof and any liability arising before or
in relation to such termination.
Section 10. Reimbursement of Expenses. If the sale of the Shares provided for
-------------------------
herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 7 hereof is not satisfied or because of any
termination pursuant to Section 9 hereof (other than by reason of a default by
any of the Underwriters), the Company shall reimburse the Underwriters,
severally upon demand, for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Shares. If the Company is required to
make any payments to the Underwriters under this Section 10 because of any
Selling Stockholder's refusal, inability or failure to satisfy any condition
34
<PAGE>
to the obligations of the Underwriters set forth in Section 7 hereof, such
defaulting Selling Stockholder, pro rata in proportion to the percentage of
--- ----
Shares to be sold by each, shall reimburse the Company on demand for all amounts
so paid.
Section 11. Information Supplied by Underwriters. The statements set forth in
------------------------------------
the last paragraph on the front cover page and under the heading "Underwriting"
in any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Section 5(a)(ii) and Section 6 hereof. The Underwriters confirm that such
statements (to such extent) are correct.
Section 12. Notices. In all dealings hereunder, you shall act on behalf of
-------
each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by the Representatives. Any notice or notification in
any form to be given under this Agreement may be delivered in person or sent by
facsimile or telephone (subject in the case of a communication by telephone to
confirmation by facsimile) addressed to :
in the case of the Company:
Artisan Components, Inc.
1195 Bordeaux Drive
Sunnyvale, California 94089
Telephone: (408) 734-5600
Facsimile: (408) 734-5050
Attention: Mark R. Templeton
in the case of the Underwriters:
Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Facsimile:
Attention:
In the case of the Selling Stockholders, any such notice shall be addressed to
the Selling Stockholders at the addresses set forth in Schedule 2 hereto. Any
notice under this Section 12 shall take effect, in the case of delivery, at the
time of delivery and, in the case of facsimile, at the time of dispatch with
confirmed receipt.
Section 13. Miscellaneous.
-------------
(a) Time shall be of the essence of this Agreement.
(b) The headings herein are inserted for convenience of reference
only and are not intended to be part of, or to affect, the meaning or
interpretation of this Agreement.
35
<PAGE>
(c) For purposes of this Agreement, (a) "business day" means any day
on which the New York Stock Exchange is open for trading, and (b) "subsidiary"
has the meaning set forth in Rule 405 under the Securities Act.
(d) This Agreement may be executed in any number of counterparts, all
of which, taken together, shall constitute one and the same Agreement and any
party may enter into this Agreement by executing a counterpart.
(e) This Agreement shall inure to the benefit of and shall be binding
upon the several Underwriters, the Company, the Selling Stockholders and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person, except that (i)
the indemnities of the Company and the Selling Stockholders contained in Section
6 hereof shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 6 hereof shall also be for the benefit of the directors of the Company,
the officers of the Company who have signed the Registration Statement, each
Selling Stockholder and any person or persons who control the Company or such
Selling Stockholder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter
shall be deemed a successor because of such purchase.
(f) The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Selling Stockholders and the several Underwriters set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, the Selling
Stockholders, any Underwriter or any controlling person referred to in Section 6
hereof and (ii) delivery of and payment for the Shares. The respective
agreements, covenants, indemnities and other statements set forth in Sections 4,
6 and 10 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
Section 14. Severability. It is the desire and intent of the parties that the
------------
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Section 15. Governing Law. The validity and interpretation of this Agreement,
-------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
36
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and the Selling Stockholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Deutsche Morgan Grenfell Inc. Master Agreement Among Underwriters,
the form of which shall be submitted to the Company for examination upon
request, but without warranty on your part as to the authority of the signers
thereof.
Very truly yours,
Artisan Components, Inc.
By_____________________________________
Chief Executive Officer
Scott T. Becker
Duane R. Hook
Daniel I. Rubin
John G. Maluki
Dhrumil Gandhi
By ____________________________________
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST L.L.C.
WESSELS, ARNOLD & HENDERSON, L.L.C.
By: DEUTSCHE MORGAN GRENFELL
By _______________________
Name:
Title:
By _______________________
Name:
Title:
For itself and on behalf of the Representatives.
37
<PAGE>
SCHEDULE 1
The Underwriters
<TABLE>
<CAPTION>
Underwriter Underwriting commitment
- ----------- -----------------------
<S> <C>
Deutsche Morgan Grenfell Inc.
Hambrecht & Quist LLC
Wessels, Arnold & Henderson, L.L.C.
---------
Total................................... 2,900,000
=========
</TABLE>
<PAGE>
SCHEDULE 2
The Selling Stockholders
<TABLE>
<CAPTION>
Number Of Shares
Selling Stockholders To Be Sold
- -------------------- ----------------
<S> <C>
Scott T. Becker 100,000
Duane R. Hook 100,000
Daniel I. Rubin 100,000
John G. Maluki 50,000
Dhrumil Gandhi 20,000
-------
Total......................................... 370,000
=======
</TABLE>
2
<PAGE>
[LOGO OF ARTISAN COMPONENTS APPEARS HERE]
ACI
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
THE CITY OF BOSTON, MA OR NEW YORK, NY CUSIP 042923 10 2
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE PER SHARE,
OF
ARTISAN COMPONENTS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
[SEAL OF ARTISAN COMPONENTS, INC. APPEARS HERE]
ARTISAN COMPONENTS, INC.
INCORPORATED
NOV. 24, 1997
DELAWARE
/s/ Beth Bartel /s/ MARK R. TEMPLETON
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/
AUTHORIZED SIGNATURE
<PAGE>
ARTISAN COMPONENTS, INC.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares of stock
of the Corporation, and upon the holders thereof as established by the
Certificate of Incorporation or by any certificate of determination of
preferences, and the number of shares constituting each class or series, and the
designations thereof, may be obtained by the holder hereof upon request and
without charge from the Secretary of the Corporation at the principal office of
the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants in common
UNIF GIFT MIN ACT -- ......................... Custodian......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act........................................................
(State)
UNIF TRF MIN ACT -- ................. Custodian (until age ....................)
(Cust)
................................... under Uniform Transfers
(Minor)
to Minors Act ..............................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------------
X
---------------------------------------
X
---------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the registration
statement on Form S-1 (File No. 333-41219) of our reports dated November 24,
1997, except for Notes 14 and 15, for which the date is January 12, 1998 on
our audits of the financial statements and the financial statement schedule of
Artisan Components, Inc. We also consent to the reference to our firm under
the caption "Experts" and "Selected Financial Data."
COOPERS & LYBRAND L.L.P.
San Jose, California
January 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 2,499
<RECEIVABLES> 3,603
<ALLOWANCES> (275)
<INVENTORY> 0
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<DEPRECIATION> (1,694)
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<BONDS> 0
0
7,564
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